HEALTH INSURANCE: Why healthy people have high coverage and those most at risk don”t

A serious problem in countries with private health insurance is that some people get under-insured or have no insurance at all. This under-insurance problem was one of the motivations for Obamacare in the United States.

Standard economic theory suggests that healthy people are suffering from under-insurance. Furthermore, policies trying to increase insurance by making a basic insurance package mandatory are not very helpful in this framework.

But most of the painful stories in the press about people forgoing much needed treatment concern people with low health status and often low income. Furthermore, in reality governments are trying to increase insurance coverage to avoid a race to the bottom.

New research by Jan Boone and Christoph Schottmüller, published in the February 2017 issue of the Economic Journal, introduces a framework in which it is indeed the low income, low health people that end up being under-insured with the dire consequences that follow. Policies increasing coverage for this vulnerable group can help a lot.

Two ingredients in the analytical framework give these new results: first, health is a so-called ”normal good” – that is, you buy more of it as your income increases; and second, there is a positive correlation between health and income – people with higher incomes tend to be more healthy.

As a technical contribution, the model casts doubt on the (often used) so-called positive-correlation test. This tests for the presence of asymmetric information in a market by identifying a positive correlation between coverage and (realised) risk. The researchers show that the correlation between risk and coverage can be negative in their model although asymmetric information is present and relevant.

”Health Insurance without Single Crossing: Why Healthy People have High Coverage” by Jan Boone and Christoph Schottmüller is published in the February 2017 issue of the Economic Journal. Jan Boone is at Tilburg University. Christoph Schottmüller is at the University of Copenhagen.

Christoph Schottmüller