Olivella, P; Vera-Hernández, M; (2006) Testing for Adverse Selection into Private Medical Insurance. The Institute for Fiscal Studies

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Abstract

We develop a test for adverse selection and use it to examine privatehealth insurance markets. In contrast to earlier papers that consider apurely private system or a system in which private insurance supplementsa public system, we focus our attention on a system where privately fundedhealth care is substitutive of the publicly funded one. Using a model ofcompetition among insurers, we generate predictions about the correlationbetween risk and the probability of taking private insurance under bothsymmetric information and adverse selection. These predictions constitutethe basis for our adverse selection test. The theoretical model is also usefulto conclude that the setting that we focus on is especially attractive to testfor adverse selection. Using the British Household Panel Survey, we findevidence that adverse selection is present in this market. We develop a test for adverse selection and use it to examine privatehealth insurance markets. In contrast to earlier papers that consider apurely private system or a system in which private insurance supplementsa public system, we focus our attention on a system where privately fundedhealth care is substitutive of the publicly funded one. Using a model ofcompetition among insurers, we generate predictions about the correlationbetween risk and the probability of taking private insurance under bothsymmetric information and adverse selection. These predictions constitutethe basis for our adverse selection test. The theoretical model is also usefulto conclude that the setting that we focus on is especially attractive to testfor adverse selection. Using the British Household Panel Survey, we find evidence that adverse selection is present in this market.

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