Panel Paper: Adverse Selection In Health Insurance Markets: Evidence From Chile

Saturday, November 10, 2012 : 1:45 PM
Mencken (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Laura Dague, Texas A&M University and Gaston Palmucci, University of Wisconsin

In markets for health insurance, consumers may have private information about their health risk that leads to self-selection into more generous insurance plans. This phenomenon, known as adverse selection, can result in market failures. Typically, empirical studies of adverse selection in health insurance markets have had to limit themselves to a handful of plans at particular firms. We use individual-level claims data covering the universe of private insurance enrollees in Chile from 2006-2009 to investigate the degree of adverse selection in the Chilean market for private health insurance using both traditional reduced form tests and a structural model of consumer demand. In addition to extending the usual estimation context to a much broader setting, we explore the institutional features of the Chilean health insurance market, which create an interesting background in which to consider adverse selection. Chile has both a subsidized public sector in which anyone can enroll in a health insurance plan and receive coverage and a competing private sector that prices policies based on age, sex, and income. The market also features an insurance mandate for all workers. Mandates, subsidies, and price discrimination over observable consumer types are the standard policy interventions suggested in order to ameliorate the welfare effects of adverse selection. We perform counterfactual analysis to quantify the effects of these policies.