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Disentangling moral hazard and adverse selection in private health insurance

David Powell and Dana Goldman

Journal of Econometrics, 2021, vol. 222, issue 1, 141-160

Abstract: Moral hazard and adverse selection create inefficiencies in private health insurance markets and understanding the relative importance of each factor is critical for addressing these inefficiencies. We use claims data from a large firm which changed health insurance plan options to isolate moral hazard from plan selection, estimating a discrete choice model to predict household plan preferences and attrition. Variation in plan preferences identifies the differential causal impact of each health insurance plan on the entire distribution of medical expenditures. Our estimates imply that 53% of the additional medical spending observed in the most generous plan in our data relative to the least generous is due to adverse selection. We find that quantifying adverse selection by using prior medical expenditures overstates the true magnitude of selection due to mean reversion. We also statistically reject that individual health care consumption responds solely to the end-of-the-year marginal price.

Keywords: Price elasticity; Health insurance; Quantile treatment effects; Adverse selection; Moral hazard; Attrition bias; Nonadditive selection model (search for similar items in EconPapers)
JEL-codes: C21 C23 I11 I13 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Disentangling Moral Hazard and Adverse Selection in Private Health Insurance (2016) Downloads
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DOI: 10.1016/j.jeconom.2020.07.030

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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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