The interaction of direct and indirect risk selection

Normann Lorenz

Journal of Health Economics, 2015, vol. 42, issue C, 81-89

Abstract: This paper analyzes the interaction of direct and indirect risk selection in health insurance markets. It is shown that direct risk selection – using measures unrelated to the benefit package like selective advertising or ‘losing’ applications of high risk individuals – nevertheless has an influence on the distortions of the benefit package caused by indirect risk selection. Direct risk selection (DRS) may either increase or decrease these distortions, depending on the type of equilibrium (pooling or separating), the type of DRS (positive or negative) and the type of cost for DRS (individual-specific or not). Regulators who succeed in reducing DRS by, e.g., banning excessive advertising or implementing fines for ‘losing’ applications, may therefore (unintendedly) mitigate or exacerbate the distortions of the benefit package caused by indirect risk selection. It is shown that the interaction of direct and indirect risk selection also alters the formula for optimal risk adjustment.

Keywords: Risk selection; Risk adjustment; Health insurance; Discrete choice; Imperfect competition (search for similar items in EconPapers)
JEL-codes: I13 I18 L13 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167629614001507
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:42:y:2015:i:c:p:81-89

DOI: 10.1016/j.jhealeco.2014.12.003

Access Statistics for this article

Journal of Health Economics is currently edited by J. P. Newhouse, A. J. Culyer, R. Frank, K. Claxton and T. McGuire

More articles in Journal of Health Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().