The role of government in health insurance markets with adverse selection

This paper analyzes the welfare economics of three arrangements for purchasing health insurance: competitive markets in which consumers are free to choose among options with different levels of coverage and prices; systems with compulsory partial pooling which permit private firms to sell supplementary coverage; and government-run pools that purchase comprehensive coverage at a single price for all consumers. Competitive insurance markets are assumed to face the problem of ‘adverse selection’. This refers to a situation in which the insurer cannot observe characteristics of individuals that affect the cost of insurance and that are known to the individuals. Competitive markets with adverse selection are not efficient because low risks cannot purchase comprehensive insurance coverage. However, government-run pools with comprehensive coverage are an inefficient solution to the problem of adverse selection. Compulsory partial coverage may represent an attractive alternative to both competitive markets and comprehensive pools. We discover two situations when government intervention of this type will succeed: when there are not many high risks in the population, and when the risk types are similar. We discuss the implications of these results for health insurance programs in several countries. Our results also have implications for the allocation of public funds for disease-prevention projects. A project targeted at high risks will produce external benefits for low risks, even though they are not directly affected by the program. However, a successful project might eliminate the market for private insurance; in this case the government should consider mandating partial insurance coverage.Copyright © 1998 John Wiley & Sons, Ltd.     

Consumer mobility in social health insurance markets

During the 1990s, the social health insurance schemes of Germany, the Netherlands, Switzerland, Belgium and Israel were significantly reformed by the introduction of freedom of choice (open enrolment) of health insurer. This was introduced alongside a system of risk adjustment to compensate health insurers for enrolees with predictable high medical expenses. Despite the similarity in the health insurance reforms in these countries, we find that both the rationale behind these reforms and their impact on consumer choice vary widely.In this article we seek to explain the observed variation in switching rates by cross-country comparison of the potential determinants of health insurer choice. We conclude that differences in choice setting, and in the net benefits of switching, offer a plausible explanation for the large differences in consumer mobility.Finally, we discuss the policy implications of our cross-country comparison. We argue that the optimal switching rate crucially depends on the goals of the reforms and the quality of the risk-adjustment system. In view of this, we conclude that switching rates are currently too low in the Netherlands, and an active government policy to encourage consumer mobility seems warranted. In Germany and Switzerland, high switching rates call for an improvement of the rather poor risk-adjustment systems. Given low switching rates in Israel and Belgium, improving risk adjustment is less urgent, but still required in the long run.     

Adverse selection and regulation in health insurance markets

In this paper we look at various ways to regulate the health insurance market and ask whether they provide an answer to the problem of adverse selection. To avoid inefficiency, government policy must either effectuate some cross-subsidization of insurance policies within the state sector or grant private insurance firms an exclusive right to serve certain groups of the population. Recent reforms in the Netherlands and Germany and President Clinton's proposals for the US could be adapted to fulfil these requirements. Efficiency cannot be achieved, on the other hand, if the regulator tries to "prescribe" cross-subsidization within the private sector.     

Switching benefits and costs in competitive health insurance markets: A conceptual framework and empirical evidence from the Netherlands

Competitive health insurance markets will only enhance cost-containment, efficiency, quality, and consumer responsiveness if all consumers feel free to easily switch insurer. Consumers will switch insurer if their perceived switching benefits outweigh their perceived switching costs. We developed a conceptual framework with potential switching benefits and costs in competitive health insurance markets. Moreover, we used a questionnaire among Dutch consumers (1091 respondents) to empirically examine the relevance of the different switching benefits and costs in consumers’ decision to (not) switch insurer. Price, insurers’ service quality, insurers’ contracted provider network, the benefits of supplementary insurance, and welcome gifts are potential switching benefits. Transaction costs, learning costs, ‘benefit loss’ costs, uncertainty costs, the costs of (not) switching provider, and sunk costs are potential switching costs. In 2013 most Dutch consumers switched insurer because of (1) price and (2) benefits of supplementary insurance. Nearly half of the non-switchers – and particularly unhealthy consumers – mentioned one of the switching costs as their main reason for not switching. Because unhealthy consumers feel not free to easily switch insurer, insurers have reduced incentives to invest in high-quality care for them. Therefore, policymakers should develop strategies to increase consumer choice.     

A comment on Neudeck and Podczeck's "adverse selection and regulation in health insurance markets".

Using the Grossman equilibrium concept, Neudeck and Podczeck [Journal of Health Economics 15 (1996) 387] show that imposing a minimum standard on a perfectly competitive insurance market can result in anti-competitive effects: decreased welfare with some insurers earning positive profits. However, the Grossman concept precludes an insurer from offering two separating, cross-subsidizing health plans. When an insurer can offer multiple plans (as under both the Nash and Miyazaki-Wilson equilibrium concepts), I show that minimum standards result in a doubleton equilibrium, never allow positive total profits, and increase welfare. This is of interest since in 1997 more than half of establishments in the US offering choice of multiple plans did so through a single insurer.     

The goal of risk equalization in regulated competitive health insurance markets

Different opinions exist about the goal of risk equalization in regulated competitive health insurance markets. There seems to be consensus that an element of the goal of risk equalization is ‘to remove the predictable over- and undercompensations of subgroups of insured’ or, equivalently, ‘to achieve a level playing field for each risk composition of an insurer’s portfolio’ or, equivalently, ‘to remove the incentives for risk selection’. However, the role of efficiency appears to be a major issue: should efficiency also be an element of the goal of risk equalization, or should it be a restriction to the goal, or should efficiency not be an element of the goal or a restriction to the goal? If efficiency plays a role, a comprehensive analysis of the total effect of risk equalization on efficiency needs to be done. An improvement of the performance of a risk equalization scheme has both negative and positive effects on efficiency. Negative effects include the reduction in efficiency via cost- or utilization-based risk adjusters. Positive effects result from leveling the playing field and reducing the incentives for risk selection, which increase efficiency as the outcome of a competitive market. In practice many regulators and policy makers take efficiency into consideration by looking at the negative effects, but hardly at the positive effects. The definition of the goal of risk equalization has consequences for the design and evaluation of risk equalization schemes and for the equalization payments. We describe relevant potential goals, tradeoffs and possible solutions.

     

Adverse selection in the health insurance market: some empirical evidence

This paper tests for the existence of adverse selection in the Brazilian individual health insurance market in 2003. The testing approach adapts that conceived by Chiappori and Salanié (Eur Econ Rev 41, 943–950, 1997; J Polit Econ 108, 56–78, 2000). After controlling for sex, age, income, number of dependents, occupational groups and schooling levels, the evidence favors adverse selection as indicated by a positive correlation between the coverage of the contract and occurrence of illnesses (as approximated by hospitalization) was not strong. The consideration of complex sampling in the probit estimations led to empirical evidence that does not indicate the presence of adverse selection, but which highlighted some interesting features of the relationship between the selected variables.     

Switching costs in competitive health insurance markets: The role of insurers' pricing strategies

Our article deals with pricing strategies in Swiss health insurance markets and focuses on the relationship between basic and supplementary insurance. We analyzed how firms' pricing strategies (i.e., pricing of basic and supplementary products) can create switching costs in basic health insurance markets, thereby preventing competition in basic insurance from working properly. More specifically, using unique market and survey data, we investigated whether firms use bundling strategies or supplementary products as low‐price products to attract and retain basic insurance consumers. To our knowledge, this is the first paper to analyze these pricing strategies in the context of insurance/health insurance. We found no evidence of bundling in the Swiss setting. We did however observe that firms used low‐price supplementary products that contributed to lock in consumers. A majority of firms offered at least one of such product at a low price. None offered low‐price products in both basic and supplementary markets. Low‐price insurance products differed across firms. When buying a low‐price supplementary product, consumers always bought their basic contract from the same firm. Furthermore, those who opted for low‐price supplementary products were less likely to declare an intention to switch basic insurance firms in the near future. This result was true for all risk category levels.     

The potential premium range of risk-rating in competitive markets for supplementary health insurance

In this paper, we simulate several scenarios of the potential premium range for voluntary (supplementary) health insurance, covering benefits which might be excluded from mandatory health insurance (MI). Our findings show that, by adding risk-factors, the minimum premium decreases and the maximum increases. The magnitude of the premium range is especially substantial for benefits such as medical devices and drugs. When removing benefits from MI policymakers should be aware of the implications for the potential reduction of affordability of voluntary health insurance coverage in a competitive market.      

Imperfect risk adjustment,risk preferences,and sorting in competitive health insurance markets

I develop a model of insurer price-setting and consumer welfare under risk-adjustment, a policy commonly used to combat inefficient sorting due to adverse selection in health insurance markets. I use the model to illustrate graphically that risk-adjustment causes health plan prices to be based on costs not predicted by the risk-adjustment model (“residual costs”) rather than total costs, either weakening or exacerbating selection problems depending on the correlation between demand and costs predicted by the risk-adjustment model. I then use a structural model to estimate the welfare consequences of risk-adjustment, finding a welfare gain of over $600 per person-year.     

Premium subsidies for health insurance: excessive coverage vs. adverse selection

The tax subsidy for employment-related health insurance can lead to excessive coverage and excessive spending on medical care. Yet, the potential also exists for adverse selection to result in the opposite problem-insufficient coverage and underconsumption of medical care. This paper uses the model of Rothschild and Stiglitz (R-S) to show that a simple linear premium subsidy can correct market failure due to adverse selection. The optimal linear subsidy balances welfare losses from excessive coverage against welfare gains from reduced adverse selection. Indeed, a capped premium subsidy may mitigate adverse selection without creating incentives for excessive coverage.     

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

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.     

商业医疗保险中的逆选择和道德风险控制研究

目前，我国的社会医疗保险只能提供低水平的基本医疗服务，且覆盖面很小，而商业医疗保险能对社会医疗保险起到替代性和补充性作用。随着生活水平的提高，人们对医疗保险的需求将呈现多元化趋势，因而商业医疗保险发展的空间越来越大。所有的寿险公司都看到了健康市场蕴含的无限商机，但是由于在医疗保险市场交易中信息总是不对称的，投保人有保险人所不了解的私人信息。     

Adverse selection and categorical discrimination in the health insurance markets: the effects of genetic tests

In this paper, the effects of new methods for risk classification, e.g., genetic tests, on health insurance markets are studied using an insurance model with state contingent utility functions. The analysis focuses on the case of treatment costs higher than the patient's willingness to pay where standard models of asymmetric information are not applicable. In this case, the benefit from signing a fair insurance contract will be positive only if illness probability is low. In contrast to the common perception, additional risk classification under symmetric information can be efficiency enhancing. Under asymmetric information about illness risks, however, there can be complete market failure.     

Consumer price sensitivity in Dutch health insurance

Aim To estimate the price sensitivity of consumer choice of health insurance firm. Method Using paneldata of the flows of insured between pairs of Dutch sickness funds during the period 1993–2002, we estimate the sensitivity of these flows to differences in insurance premium. Results The price elasticity of residual demand for health insurance was low during the period 1993–2002, confirming earlier findings based on annual changes in market share. We find small but significant elasticities for basic insurance but insignificant elasticities for supplementary insurance. Young enrollees are more price sensitive than older enrollees. Conclusion Competition was weak in the market for health insurance during the period under study. For the market-based reforms that are currently under way, this implies that measures to promote competition in the health insurance industry may be needed.      

Dynamic process of adverse selection: evidence from a subsidized community-based health insurance in rural China

This article examines the changes of adverse selection over time during a 3-year subsidized, voluntary-based Community Health Insurance (CHI) scheme in rural China. The data came from a 4-year longitudinal social experimental study (2002-2006) on the CHI in Fengsan Township, Guizhou Province of China. A panel of 8198 observations (average of 2730 individuals) was analyzed using random effect logit model. We found that the effect of health status on the enrollment choice of the CHI scheme was significant. People with chronic condition history, with fair health, and with poor health were more likely to enroll in the scheme than those without chronic condition and with good health status. In addition, we found that almost all of the interaction terms of the health status variables and CHI wave variable were not significant, which indicates that the effects of adverse selection have not significantly changed over time. Furthermore, people with medium income and high income were more likely to enroll in the scheme compared to those with low income. This shows that adverse selection persisted in the subsequent enrollments of the CHI scheme, even with the government subsidy to the premium. However, adverse selection did not become more or less severe over time and worked through to a steady state. In addition, inequity of enrollment still exists under the current premium subsidy policy. Based on the findings, relevant policy implications are put forward to further improve the CHI scheme.     

Health information and health insurance

In summary, the need for protection of personal privacy, especially when it comes to sensitive medical information, should be regulated to prevent unnecessary and unauthorized dissemination. At the same time, in the interests of optimal patient care at the least expense, regulations, procedures and technology must be in place to allow ready access by all professionals having responsibility for providing and managing this care. In addition, the system must provide for similar ease and right of access to insurers and their representatives who have contracted with the client for necessary health benefits.