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How adverse selection affects the health insurance market

Author

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  • Belli, Paolo
Abstract
Adverse selection can be defined as strategic behavior by the more informed partner in a contract against the interest of the less informed partner(s). In the health insurance field, this manifests itself through healthy people choosing managed care and less healthy people choosing more generous plans. Drawing on theoretical literature on the problem of adverse selection in the health insurance market, the author synthesizes concepts developed piecemeal over more than 20 years, using two examples and revisiting the classical contribution of Rothschild and Stiglitz. He highlights key insights, especially from the literature on"equilibrium refinements"and on the theory of"second best."The government can correct spontaneous market dynamics in the health insurance market by directly subsidizing insurance or through regulation; the two forms of intervention provide different results. Providing partial public insurance, even supplemented by the possibility of opting out, can lead to second-best equilibria. The same result holds as long as the government can subsidize contracts with higher-than-average premium-benefit ratios and can tax contracts with lower-than-average premium-benefit ratios. The author analyzes the following policy options relating to the public provision of insurance: a) Full public insurance. b) Partial public insurance with or without the possibility of acquiring supplementary insurance and with or without the possibility of opting out. In recent plans implemented in Germany and the Netherlands, where competition among several health funds and insurance companies was promoted, a public fund was created to discourage risk screening practices by providing the necessary compensation across riks groups. But only"objective"risk adjusters (such as age, gender, and region) were used to decide which contracts to subsidize. Those criteria alone cannot correct the effects of adverse selection. Regulation can exacerbate the problem of adverse selection and lead to chronic market instability, so certain steps must be taken to prevent risk screening and preserve competition for the market. The author considers the following three policy options for regulating the private insurance market: 1) A standard contract with full coverage. 2) Imposition of a minimum insurance requirement. 3) Imposition of premium rate restrictions.

Suggested Citation

  • Belli, Paolo, 2001. "How adverse selection affects the health insurance market," Policy Research Working Paper Series 2574, The World Bank.
    • Handle: RePEc:wbk:wbrwps:2574
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    References listed on IDEAS

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    2. David M. Cutler & Richard J. Zeckhauser, 1998. "Adverse Selection in Health Insurance," NBER Chapters, in: Frontiers in Health Policy Research, Volume 1, pages 1-32, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona School of Economics.
    2. Sojo, Ana, 2003. "Social vulnerability, insurance and risk diversification in Latin America and the Caribbean," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    3. Osei Afriyie, Doris & Masiye, Felix & Tediosi, Fabrizio & Fink, Günther, 2023. "Confidence in the health system and health insurance enrollment among the informal sector population in Lusaka, Zambia," Social Science & Medicine, Elsevier, vol. 321(C).
    4. El-Sayed, Abdulrahman M. & Palma, Anton & Freedman, Lynn P. & Kruk, Margaret E., 2015. "Does health insurance mitigate inequities in non-communicable disease treatment? Evidence from 48 low- and middle-income countries," Health Policy, Elsevier, vol. 119(9), pages 1164-1175.
    5. Ronald Eduardo Gómez Suárez, 2007. "Cream-Skimming And Risk Adjustment in Colombian Health Insurance System:: The Public Insurer Case," Archivos de Economía 4295, Departamento Nacional de Planeación.
    6. Stella A. Quimbo & John W. Peabody & Riti Shimkhada & Jhiedon Florentino & Orville Solon, 2011. "Evidence of a causal link between health outcomes, insurance coverage, and a policy to expand access: experimental data from children in the Philippines," Health Economics, John Wiley & Sons, Ltd., vol. 20(5), pages 620-630, May.
    7. Hussey, P. & Anderson, G. F., 2003. "A comparison of single- and multi-payer health insurance systems and options for reform," Health Policy, Elsevier, vol. 66(3), pages 215-228, December.
    8. Kullberg, Linn & Blomqvist, Paula & Winblad, Ulrika, 2019. "Health insurance for the healthy? Voluntary health insurance in Sweden," Health Policy, Elsevier, vol. 123(8), pages 737-746.
    9. Watinee Kunpeuk & Pard Teekasap & Hathairat Kosiyaporn & Sataporn Julchoo & Mathudara Phaiyarom & Pigunkaew Sinam & Nareerut Pudpong & Rapeepong Suphanchaimat, 2020. "Understanding the Problem of Access to Public Health Insurance Schemes among Cross-Border Migrants in Thailand through Systems Thinking," IJERPH, MDPI, vol. 17(14), pages 1-19, July.
    10. Khetrapal, Sonalini & Acharya, Arnab & Mills, Anne, 2019. "Assessment of the public-private-partnerships model of a national health insurance scheme in India," Social Science & Medicine, Elsevier, vol. 243(C).
    11. Daniel Simonet, 2009. "Managed Care expansion to Asia: a critical review," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 23(2), pages 29-51, November.

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    Health Economics&Finance; Environmental Economics&Policies; Insurance&Risk Mitigation; Insurance Law; Financial Intermediation;
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