Risk selection and heterogeneous preferences in health insurance markets with a public option

Maria Polyakova

Journal of Health Economics, 2016, vol. 49, issue C, 153-168

Abstract: Conventional wisdom suggests that if private health insurance plans compete alongside a public option, they may endanger the latter's financial stability by cream-skimming good risks. This paper argues that two factors may contribute to the extent of cream-skimming: (i) degree of horizontal differentiation between public and private options when preferences are heterogeneous; (ii) whether contract design encourages choice of private insurance before information about risk is revealed. I explore the role of these factors empirically within the unique institutional setting of the German health insurance system. Using a fuzzy regression discontinuity design to disentangle adverse selection and moral hazard, I find no compelling support for extensive cream-skimming of public option by private insurers despite their ability to fully underwrite risk. A model of demand for private insurance supports the idea that heterogeneity in non-pecuniary preferences and long-term structure of private insurance contracts may be muting cream-skimming in this setting.

Keywords: Health insurance; Public option; Adverse selection; Individual mandate; German insurance (search for similar items in EconPapers)
JEL-codes: D12 G22 H44 I13 I18 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:49:y:2016:i:c:p:153-168

DOI: 10.1016/j.jhealeco.2016.06.012

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