Session: Selecting Insurance
Room: Upson 117
Time: Wed 10:15-11:45

Presenter: Jonneke Bolhaar (VU University Amsterdam. Economics)

Discussant: Åke BlomqvistCentral University of Finance and Economics

Abstract

This paper looks into the search behavior of consumers in the market for health insurance contracts. We consider the recent health insurance reform in The Netherlands on January 1, 2006, that forced everyone to reassess their health insurance contract. The reform replaced a private-public mix of health insurance provision by a system based on managed competition, where all insurers compete with each other within rules set by the government. The current Dutch system has many similarities with the Swiss health insurance system, and is an inspiration for the health insurance reforms recently suggested by the Obama administration. These ambitions have renewed international interest in incentives of competition within social insurances.

The Dutch regulations oblige everyone to buy a basic insurance package of which the content is determined by the government. Insurance companies are not allowed to refuse applicants for this basic package and to differentiate premiums by any measure of risk (age, health, etc.). A Risk Equalization Fund compensates insurers who have a disproportionate number of high-risk individuals among their insurees. Insurance companies are free to set their own price for the basic insurance package and to compete for insurees.

Consumer search for health insurance plays an essential role in this system. If individuals search sufficiently for the lowest premium, the system should provide incentives to insurers to improve their efficiency and lower their premiums. However, we observe substantial premium dispersion (monthly premiums for basic coverage range from 82 to 98 euros).

We develop a consumer search model that builds on Stahl (AER, 1989) and Janssen and Moraga-Gonzalez (REStud, 2004) and contains the main features of the Dutch health insurance system. Individuals are only heterogeneous in their health, which determines their utility of insurance coverage. Each individual receives an offer for health insurance from his current insurer, and, in addition, may receive an offer for a group contract. These group contracts are mostly offered via employers and give a discount on the premium. After having received the offer(s), individuals decide whether or not to search the market for a lower priced insurance contract.

The model provides a number of testable predictions on insurance choice and search behavior, which we test on data from the Dutch Health Care Consumer Panel. We find that the simple consumer search model describes the choice for insurance coverage well, but fails in explaining individual search decisions. We argue that the latter is due to heterogeneous search costs that are related to knowledge about the system, and that individuals with low search costs are more likely to obtain an offer for a group contract. This generates a situation of third-degree price discrimination which causes that individuals without an offer for a group contract (and most likely higher search costs) pay a higher premium, and also obtain reduced insurance coverage. From this observation one may question the usefulness of allowing for group contracts as they cause more variation in both premiums and insurance coverage, and therewith more inequality of access to health care within the population.

Key Terms

health insurance, search models

Authors:

Jonneke Bolhaar (VU University Amsterdam. Economics) , Maarten Lindeboom (VU University Amsterdam. Economics) and Bas Van der Klaauw (VU University Amsterdam. Economics)