Preference heterogeneity and selection in private health insurance: The case of Australia

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Journal Article
Journal Of Health Economics, 2013, 32 (5), pp. 757 - 767
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A basic prediction of theoretical models of insurance is that if consumers have private information abouttheir risk of suffering a loss there will be a positive correlation between risk and the level of insurancecoverage. We test this prediction in the context of the market for private health insurance in Australia.Despite a universal public system that provides comprehensive coverage for inpatient and outpatient care,roughly half of the adult population also carries private health insurance, the main benefit of which is moretimely access to elective hospital treatment. Like several studies on different types of insurance in othercountries, we find no support for the positive correlation hypothesis. Because strict underwriting regu-lations create strong information asymmetries, this result suggests the importance of multi-dimensionalprivate information. Additional analyses suggest that the advantageous selection observed in this marketis driven by the effect of risk aversion, the ability to make complex financial decisions and income.
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