DP7942 Insurance Search and Switching Behavior

Author(s): Jonneke Bolhaar, Maarten Lindeboom, Bas van der Klaauw
Publication Date: August 2010
Keyword(s): Adverse selection, Consumer search, Group contracts, Health insurance, Managed competition
JEL(s): D82, D83, I18
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7942

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, where a private-public mix of insurance provision was replaced by a system based on managed competition. Although all insurers offer the same basic package (determined by the government), there is substantial premium dispersion. We develop a simple consumer search model containing the main features of the Dutch health insurance system. This model provides us with a number of hypotheses, which we test using data from the Dutch Health Care Consumer Panel. The data confirm the standard predictions on consumer choice (i.e. there is adverse selection and a lower premium increases coverage). We also find that consumers with lower search costs are more likely to receive a group contract offer. This generates a situation of price discrimination where individuals without group contracts and higher search costs pay higher premiums and buy lower insurance coverage.