Incomplete risk adjustment and adverse selection in the German public health insurance system

Unvollständiger Risikostrukturausgleich und Adverse Selektion in der Gesetzlichen Krankenversicherung Deutschlands

Thomas Knaus and Robert Nuscheler

No FS IV 02-27, Discussion Papers, Research Unit: Market Processes and Governance from WZB Berlin Social Science Center

Abstract: The German statutory health insurance market was exposed to competition in 1996. To avoid adverse selection, a prospective risk compensation scheme was introduced in 1994. Due to their low contribution rates, company-based sickness funds were able to attract a lot of new members. We analyze – using data from the German Socio- Economic Panel – the determinants of these transitions from 1995 to 2000. By estimating a simultaneous two equation system, we find that health status positively, and significantly, affects the probability of changing to a company-based sickness fund, especially after controlling for age. Thus the risk compensation scheme does not fully control for the health status of the changers. Consequently, the comparative advantages of company-based funds will increase over time. This observation provides evidence for the standard Rothschild-Stiglitz separating equilibrium.

Keywords: Health insurance choice; adverse selection; risk compensation; bivariate probit model; health production (search for similar items in EconPapers)
JEL-codes: C31 C35 I11 I18 (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (6)

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