Health Economics: Australia Abstract of the Day

A basic prediction of theoretical models of insurance is that if consumers have private information about their risk of suffering a loss there will be a positive correlation between risk and the level of insurance coverage. 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 more timely access to elective hospital treatment. Like several studies on different types of insurance in other countries, we find no support for the positive correlation hypothesis. Because strict underwriting regulations create strong information asymmetries, this result suggests the importance of multi-dimensional private information. Additional analyses suggest that the advantageous selection observed in this market is driven by the effect of risk aversion, the ability to make complex financial decisions and income.

Source: Buchmueller et al. (Journal of Health Economics, September 2013).  

From the conclusions:

We find that adults covered by private hospital insurance spend fewer nights in hospital over the course of a year than individuals without private coverage. Privately insured individuals are in better self-reported health and are less likely to report a recent physician’s visit. Since private insurance in Australia provides no reimbursement for outpatient care, this latter result can be interpreted as evidence that the privately insured group is healthier than the group without private coverage. Thus, our results are consistent with advantageous, rather than adverse selection . . . 

Our analysis of household expenditure data indicates that consumers who purchase private health insurance are also significantly more likely to purchase other types of insurance.

Drafts of the paper and a slide presentation are here.