Risk selection and heterogeneous preferences in health insurance markets with a public option |
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Affiliation: | 1. Department of Economics, University of Bergen, Postbox 7800, 5020 Beregen, Norway;2. Department of Economics, The University of Sheffield, 9 Mappin Street, Sheffield S1 4DT, UK;3. COHERE, Department of Business and Economics, University of Southern Denmark;4. COHERE, Department of Public Health, University of Southern Denmark;5. Department of Community Medicine, UiT, The Arctic University of Norway;6. Health Economics Research Unit, University of Aberdeen, Polwarth Building, Foresterhill, Aberdeen AB25 2ZD, UK;1. Stanford Institute for Economic Policy Research, Stanford University, United States;2. National Bureau of Economic Research (NBER), United States;3. Carlson School of Management, University of Minnesota, United States;4. Institute for the Study of Labor (IZA), Germany |
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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. |
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