Testing for adverse selection into private medical insurance

Pau Olivella and Marcos Vera-Hernandez

No W06/02, IFS Working Papers from Institute for Fiscal Studies

Abstract: We develop a test for adverse selection and use it to examine private health insurance markets. In contrast to earlier papers that consider a purely private system or a system in which private insurance supplements a public system, we focus our attention on a system where privately funded health care is substitutive of the publicly funded one. Using a model of competition among insurers, we generate predictions about the correlation between risk and the probability of taking private insurance under both symmetric information and adverse selection. These predictions constitute the basis for our adverse selection test. The theoretical model is also useful to conclude that the setting that we focus on is especially attractive to test for adverse selection. Using the British Household Panel Survey, we find evidence that adverse selection is present in this market.

Keywords: Contract theory; Testing; Health Insurance (search for similar items in EconPapers)
JEL-codes: D82 G22 I19 (search for similar items in EconPapers)
Pages: 48 pp.
Date: 2006-01-19
New Economics Papers: this item is included in nep-com, nep-fin, nep-hea and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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