Adverse selection in Australian private health insurance

Abstract

We assess adverse selection in Australian private health insurance using the longitudinal data in the Household, Income, and Labour Dynamics in Australia (HILDA) Survey. Cross-sectional and balanced panel probit regressions specify the demand for health insurance as a function of self-assessed health condition, health risk factors, and socioeconomic controls including age, income, education, family structure, and welfare status. We find that while adverse selection is present, it has decreased over time, likely through a combination of deliberate government policy and changes in market conditions, combined with the impact of heterogeneous preferences and risk aversion. We also identify a tendency for advantageous selection in the insured pool.

Keywords: Private health insurance, adverse selection, advantageous selection, health risk factors, self-assessed health, Australia

JEL Classification: D24, G22, I13, I18