Adverse selection and consumer inertia: empirical evidence from the Dutch health insurance market

Abstract

This paper examines to what extent consumer inertia can reduce adverse selection in health insurance markets. To this end, we investigate consumer choice of deductible in the Dutch health insurance market over the period 2013-2018, using panel data based on a large random sample (266 k) of all insured individuals in the Netherlands. The Dutch health insurance market offers a unique setting for studying adverse selection, because during annual open enrollment periods all adults are free to choose an extra deductible up to 500 euro per year. By focusing on deductible choices of those who do not switch health plans, we are able to examine the 'pure' adverse selection effect (i.e., not distorted by other health plan attributes). We estimate a dynamic logit model to examine individuals' deductible choice. We find evidence of adverse selection, as people with higher previous health care cost are substantially less likely to take up or keep a 500-euro deductible. We also find that adverse selection is counteracted by a high level of consumer inertia, as the average partial effect on deductible choice of the previous selected deductible level is much larger than the average partial effect of a change in health care costs.

Keywords: Adverse selection; Choice persistence; Consumer inertia; Deductible; Health insurance.

Fig. 1

Distribution of log(cost + 1) transformed individual health care expenses