Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Adverse Selection, Moral Hazard and the Demand for Medigap Insurance
Author(s): Michael Keane and Olena Stavrunova
Date of publication: November 2011
Working paper number: 167
The size of adverse selection and moral hazard effects in health insurance markets has important policy implications. For example, if adverse selection effects are small while moral hazard effects are large, conventional remedies for inefficiencies created by adverse selection (e.g., mandatory insurance enrolment) may lead to substantial increases in health care spending. Unfortunately, there is no consensus on the magnitudes of adverse selection vs. moral hazard. This paper sheds new light on this While both adverse selection and moral hazard effects of Medigap have been studied separately, this is the first paper to estimate both in an unified econometric framework.

We develop an econometric model of insurance demand and health care expenditure, where adverse selection is measured by sensitivity of insurance demand to expected expenditure. The model allows for correlation between unobserved determinants of expenditure and insurance demand, and for heterogeneity in the size of moral hazard effects. Inference relies on an MCMC algorithm with data augmentation. Our results suggest there is adverse selection into Medigap, but the effect is small. A one standard deviation increase in expenditure risk raises the probability of insurance purchase by 0.037. In contrast, our estimate of the moral hazard effect is much larger. On average, Medigap coverage increases health care expenditure by 32%.

Paper: Download (Format: PDF, Size: 584 Kb)
Comments: Under review by the Journal of Econometrics
Known citations:

Keane, M. and Stavrunova, O., 2011, "A Smooth Mixture of Tobits Model for Healthcare Expenditure", Health Economics, 20(9), 1126–1153.

王晓全, 阎建军, & 孙祁祥, 2012, 保险经济学: 一个综述, 金融评论4, 011.