Moral Hazard and Adverse Selection in Private Health Insurance

42 Pages Posted: 20 Mar 2014

See all articles by David Powell

David Powell

RAND Corporation

Dana P. Goldman

RAND Corporation; National Bureau of Economic Research (NBER)

Date Written: December 18, 2013


Moral hazard and adverse selection create inefficiencies in private health insurance markets. The authors use claims data from a large firm to study the independent roles of both moral hazard and adverse selection. Previous studies have attempted to estimate moral hazard in private health insurance by assuming that individuals respond only to the spot price, end-of-year price, average price, or a related metric. There is little economic justification for such assumptions and, in fact, economic intuition suggests that the nonlinear budget constraints generated by health insurance plans make these assumptions especially poor. They study the differential impact of the health insurance plans offered by the firm on the entire distribution of medical expenditures without parameterizing the plans by a specific metric. They use a new instrumental variable quantile estimation technique introduced in Powell (2013b) that provides the quantile treatment effects for each plan, while conditioning on a set of covariates for identification purposes. This technique allows us to map the resulting estimated medical expenditure distributions to the nonlinear budget sets generated by each plan. Their method also allows them to separate moral hazard from adverse selection and estimate their relative importance. They estimate that 77% of the additional medical spending observed in the most generous plan in their data relative to the least generous is due to adverse selection. The remainder can be attributed to moral hazard. A policy which resulted in each person enrolling in the least generous plan would cause the annual premium of that plan to rise by over $1,500.

Keywords: price elasticity, health insurance, quantile treatment effects, adverse selection, moral hazard

JEL Classification: I11, I13, C21, C23

Suggested Citation

Powell, David and Goldman, Dana P., Moral Hazard and Adverse Selection in Private Health Insurance (December 18, 2013). RAND Working Paper Series WR-1032. Available at SSRN: or

David Powell (Contact Author)

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Dana P. Goldman

RAND Corporation ( email )

P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics