Evidence of Selection in a Mandatory Health Insurance Market with Risk Adjustment

Abstract

This paper aims to identify selection separately from moral hazard in a mandatory health insurance market where enrollees can freely choose their deductible scheme. The empirical analysis uses a unique data set for the period 2010-2013 covering the whole population of the Netherlands at enrollee level, allowing us to use prior health expenses of the enrollees to demonstrate the selection eect separately from the potential moral hazard eect. Our estimates show that the enrollees who opt for deductibles are both healthier and have a higher risk-adjusted result (i.e. the dierence between the compensation from the risk-adjustment fund and the actual health care cost) under the prevailing risk-adjustment system. Compared to enrollees who have chosen the lowest available deductible level, enrollees who have chosen the highest deductible level have an average risk-adjusted result that is approximately AC450 higher per enrollee. An option that the Dutch government could consider to fully eliminate the risk-adjustment gain of the deductibles is to include the choice of a voluntary deductible in the risk-adjustment system as one of the characteristics of the consumer. Our detection of substantial selection eect of deductibles suggests the need of further research to understand in greater detail the relationship between premium discounts and the expected gains on the risk-adjustment for enrollees with a voluntary deductible.

Keywords: D82, G22, I18

JEL Classification: risk-adjustment,selection, adverse selection, favorable selection, deductibles