title: Risk selection and heterogeneous preferences in health insurance markets with a public option.
abstract: Conventional wisdom suggests that if private health insurance plans compete alongside a public option, they may endanger the latter's financial stability by cream-skimming good risks. This paper argues that two factors may contribute to the extent of cream-skimming: (i) degree of horizontal differentiation between public and private options when preferences are heterogeneous; (ii) whether contract design encourages choice of private insurance before information about risk is revealed. I explore the role of these factors empirically within the unique institutional setting of the German health insurance system. Using a fuzzy regression discontinuity design to disentangle adverse selection and moral hazard, I find no compelling support for extensive cream-skimming of public option by private insurers despite their ability to fully underwrite risk. A model of demand for private insurance supports the idea that heterogeneity in non-pecuniary preferences and long-term structure of private insurance contracts may be muting cream-skimming in this setting.
authors.affiliation: Department of Health Research and Policy, Stanford University, Stanford, CA, USA; NBER. Electronic address: mpolyak@stanford.edu.
authors.forename: Maria
authors.initials: M
authors.lastname: Polyakova
mesh_terms: D005858:Germany; D006801:Humans; D015273:Insurance Selection Bias; D007348:Insurance, Health; D018803:Models, Economic; D012306:Risk
keywords: Adverse selection; German insurance; Health insurance; Individual mandate; Public option