Selection on Moral Hazard in Health Insurance

70 Pages Posted: 25 Apr 2011 Last revised: 4 Apr 2015

See all articles by Liran Einav

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Stephen P Ryan

MIT; NBER

Paul Schrimpf

Massachusetts Institute of Technology (MIT); University of British Columbia (UBC) - Vancouver School of Economics

Mark R. Cullen

Stanford University

Date Written: April 2011

Abstract

In this paper we explore the possibility that individuals may select insurance coverage in part based on their anticipated behavioral response to the insurance contract. Such "selection on moral hazard" can have important implications for attempts to combat either selection or moral hazard. We explore these issues using individual-level panel data from a single firm, which contain information about health insurance options, choices, and subsequent claims. To identify the behavioral response to health insurance coverage and the heterogeneity in it, we take advantage of a change in the health insurance options offered to some, but not all of the firm's employees. We begin with descriptive evidence that is suggestive of both heterogeneous moral hazard as well as selection on it, with individuals who select more coverage also appearing to exhibit greater behavioral response to that coverage. To formalize this analysis and explore its implications, we develop and estimate a model of plan choice and medical utilization. The results from the modeling exercise echo the descriptive evidence, and allow for further explorations of the interaction between selection and moral hazard. For example, one implication of our estimates is that abstracting from selection on moral hazard could lead one to substantially over-estimate the spending reduction associated with introducing a high deductible health insurance option.

Suggested Citation

Einav, Liran and Finkelstein, Amy and Ryan, Stephen P and Schrimpf, Paul and Cullen, Mark R., Selection on Moral Hazard in Health Insurance (April 2011). NBER Working Paper No. w16969. Available at SSRN: https://ssrn.com/abstract=1820081

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

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Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Stephen P Ryan

MIT ( email )

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NBER ( email )

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Paul Schrimpf

Massachusetts Institute of Technology (MIT) ( email )

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University of British Columbia (UBC) - Vancouver School of Economics ( email )

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Mark R. Cullen

Stanford University ( email )

Stanford, CA 94305
United States

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