Disentangling Adverse Selection, Moral Hazard and Supply Induced Demand: An Empirical Analysis of the Demand for Healthcare Services

Abstract

In the healthcare sector, Selection (S), Moral Hazard (MH) and Supply Induced Demand (SID) are three very important phenomena affecting patients' behavior. Despite there exists a vast theoretical and empirical literature on these phenomena, so far, no contribution has been able to approach them jointly. This is mostly due to difficulties in modelling the joint determinants of health service utilization and health insurance choice by means of a tractable structural simultaneous equation model. In this paper, we provide a solution to this problem and estimate a simultaneous four equation structural model with four latent variables, where the first two equations are meant to deal with the adverse selection issue, while the third and fourth equation deal with moral hazard and SID issues. By doing so, our model seeks to identify causal effects while correcting for selection and endogeneity with the observational data we have. A closed form solution for the likelihood function - which guarantees an exact solution - is maximized via FIML, using a large cross-sectional dataset collected by the Italian national institute of statistic (ISTAT). The empirical analysis has conrmed the theoretical predictions of our structural model. In particular, we find evidence of selection in the choice of private insurance and SID, but do not find MH behavior on the patient side. These results are extremely important from a health policy perspective, given the existing international debate on the development of a second pillar in the financing of the healthcare system.

Keywords: Quadrivariate Probit, FIML, Supply Induced Demand, Moral Hazard, Adverse Selection, Health Insurance

JEL Classification: I13, I11, D82, C35