DP8501 Health Insurance without Single Crossing: why healthy people have high coverage
|Author(s):||Jan Boone, Christoph Schottmüller|
|Publication Date:||August 2011|
|Keyword(s):||health insurance, risk adjustment, single crossing|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8501|
Standard insurance models predict that people with high (health) risks have high insurance coverage. It is empirically documented that people with high income have lower health risks and are better insured. We show that income differences between risk types lead to a violation of single crossing in the standard insurance model. If insurers have some market power, this can explain the empirically observed outcome. This observation has also policy implications: While risk adjustment is traditionally viewed as an intervention which increases efficiency and raises the utility of low health agents, we show that with a violation of single crossing a trade off between efficiency and solidarity emerges.