Are sicker people more likely to buy health insurance?

Why do some people buy private health insurance when publicly provided health insurance is available? Are they more likely to suffer from health problems? Pau Olivella and Marcos Vera-Hernández study this question in their paper “Testing for Asymmetric Information in Private Health Insurance” published in 2013 in the Economic Journal, which recently was awarded the prize for the best paper published in the Economic Journal during 2013 by the Royal Economic Society.

Health insurance around the world

Around the world, public and private health insurance are linked in different ways. In the US, a large segment of the population is ineligible for public insurance and must resort to private health insurance (PHI). In France, Belgium, and the US Medicare, PHI is complementary to public insurance: an individual obtains a basic insurance contract from the insurer of his choice (funded by the government) and can buy a complementary PHI contract to cover whatever co-payments are not covered by the basic insurance contract. In the UK, the PHI market co-exists with a free public and universal health care option, namely the National Health Service (NHS). Indeed, everyone is publicly insured under the NHS, which is funded through taxation. So individuals contribute to the financing of public care, whether they use it or not. The NHS provides treatment instead of just financing some basic coverage. Hence, an individual can only substitute the treatment funded by the public system by receiving care funded through PHI. This means that the private insurer must bear the entire treatment cost. This is also the situation in Finland, Greece, Italy, Mexico, New Zealand, Portugal, and Spain. We refer to such private health insurance systems as “substitutive” as opposed to “complementary” (the case of France, Medicare in the US, and Belgium).

Asymmetric information and private health insurance

The main aim of this work is to test for asymmetric information in the UK’s PHI market. Asymmetric information would be present if people buying PHI have more information on their status of health or preferences for health care than the PHI provider. Unlike previous literature, the authors focus on a substitutive PHI market.

The theoretical model used by the authors reflects the distinction between substitutive and complementary PHI systems that has been outlined above. There are two types of individuals: one type has a high innate probability of seeking health care (high risk individual henceforth), while the other type has a comparably low innate probability of seeking health care (low risk individual henceforth). Two leading cases are distinguished: the symmetric and the asymmetric information case. While in the symmetric information case both the insurer and the individual know who is a high risk and who is a low risk, in the asymmetric information case only the individual knows his own risk.

The theoretical model predicts that low risk individuals will buy PHI while high risk individuals will opt for the public option if information is symmetric. This is because the former benefit from a low premium offered by the PHI. Interestingly, the prediction completely reverses if information is asymmetric. In this case, low risk individuals will opt for the public option and high risks for the PHI. This is because the PHI cannot offer good coverage to the low risks: if they did then high risk individuals would disguise themselves as low risks leading the PHI to have losses. Facing the option of poor coverage from the PHI, the low risk individual chooses the public insurance option, which does not charge an additional premium. In summary, the theoretical model gives clear predictions to use for testing: if the ones purchasing PHI are the low risks then information is symmetric; if the ones purchasing PHI are the high risks then information is asymmetric.

Testing for asymmetric information

The authors take these implications to the data to test whether information is asymmetric or not. They use a sample of male employees of the British Household Panel Survey collected over the period 1996-2008 (University of Essex 2010). PHI is relatively uncommon in Britain and only taken up by 12-13% in the 1997-2007 period. The PHI market is usually divided into the individual market and the corporate market. In the individual market, customers buy insurance directly from the insurer or an insurance broker. In the corporate market, individuals obtain PHI from their employer. Although in some cases the employee has to contribute directly towards the cost of the premium in 79% of cases the employee receives it free as a fringe benefit.

Since the actual innate probability of seeking medical care cannot be measured, the authors use health care use as a proxy for it. This however brings the problem that individuals with PHI have better access conditions to health care (for instance, they face lower waiting times). Hence, one cannot compare health care use between those with and those without PHI. The authors instead compare the probability of using health care services for those who purchase PHI directly with that for those who receive it as a fringe benefit from their employer. Because these two groups enjoy PHI, any observed differences in health care use cannot be due to differences in the access conditions, but must be due to differences in the innate probability of seeking medical care. The conditional probability of using health care (hospitalization, general practitioner visits, and preventive tests) is significantly higher for the group who bought PHI directly than for those who receive it as a fringe benefit from their employer. Specifically, individuals with employer-provided PHI are 2.9 percentage points less likely to be hospitalized, which is a sizeable amount considering that 4.9% of the sample have been hospitalized during the reference period. This allows the author to conclude that it is the high risk individuals who buy PHI, which in turn provides evidence of asymmetric information.

A possible criticism to this interpretation is the following. Couldn’t it simply be the case that those with employer-provided PHI are healthier than those without, and therefore visit hospitals less? Olivella and Vera-Hernández rule this out by reporting no statistically significant difference of suffering from health problems across these two insurance groups.

A second question could be: what if employers providing PHI as a fringe benefit are more concerned about their employees and facilitate preventive care? The authors resolve this doubt by showing that there exist no differences in the use of preventive tests between individuals with employer-provided PHI and individuals who bought PHI directly in the market.

The role of caring about health

Interestingly, the authors find that the source of heterogeneity between individuals seems to stem from preferences for health care rather than their true health status. Indeed, those that claim health to be very important for them are more likely to use health care services, and are also found to be more likely to have bought PHI directly in the market. A possible explanation is that the practice by insurers of excluding pre-existing conditions (together with the variables that they use for pricing) is successful at removing the asymmetric information on health status. In contrast, it is intuitive that it will be much more difficult for insurers to eliminate the asymmetric information in preferences for health/medical care.

The fact that individuals purchasing PHI are not in worse health, at least to the extent that can be measured in the data, puts into question to what extent having a private health insurance system alleviates the financial pressures in the public one. Are these individuals the ones who bring higher costs? This takes us to another empirical question for further investigation: what are the true drivers of healthcare costs? Is it preferences for health or true health status?