Disentangling Moral Hazard and Adverse Selection in Private Health Insurance

David Powell and Dana Goldman

No 21858, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Moral hazard and adverse selection create inefficiencies in private health insurance markets and understanding the relative importance of each factor is critical for policy. We use claims data from a large firm to isolate moral hazard from plan selection. Previous studies have attempted to estimate moral hazard in private health insurance by assuming that individuals respond only to the spot price, end-of-year price, expected price, or a related metric. The nonlinear budget constraints generated by health insurance plans make these assumptions especially poor and we statistically reject their appropriateness. We study the differential impact of the health insurance plans offered by the firm on the entire distribution of medical expenditures without assuming that individuals only respond to a parameterized price. Our empirical strategy exploits the introduction of new plans during the sample period as a shock to plan generosity, and we account for sample attrition over time. We use an instrumental variable quantile estimation technique that provides quantile treatment effects for each plan, while conditioning on a set of covariates for identification purposes. This technique allows us to map the resulting estimated medical expenditure distributions to the nonlinear budget sets generated by each plan. We estimate that 53% of the additional medical spending observed in the most generous plan in our data relative to the least generous is due to moral hazard. The remainder can be attributed to adverse selection. A policy which resulted in each person enrolling in the least generous plan would cause the annual premium of that plan to rise by $1,000.

JEL-codes: I1 I10 I11 I12 I13 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-hea and nep-ias
Note: EH
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as David Powell & Dana Goldman, 2020. "Disentangling moral hazard and adverse selection in private health insurance," Journal of Econometrics, .

Downloads: (external link)
http://www.nber.org/papers/w21858.pdf (application/pdf)

Related works:
Journal Article: Disentangling moral hazard and adverse selection in private health insurance (2021)
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:nbr:nberwo:21858

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w21858

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().