Basic versus Supplementary Health Insurance: Moral Hazard and Adverse Selection

Abstract

This paper introduces a tractable model of health insurance with both moral hazard and adverse selection. We show that government sponsored universal basic insurance should cover treatments with the biggest adverse selection problems. Treatments not covered by basic insurance can be covered on the private supplementary insurance market. Surprisingly, the cost effectiveness of a treatment does not affect its priority to be covered by basic insurance.

Keywords: universal basic health insurance, voluntary supplementary insurance, public vs private insurance, adverse selection, moral hazard, cost effectiveness

JEL Classification: I13, D82, H51