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Sources of Advantageous Selection
Evidence from the Medigap Insurance Market
Published: April 2008
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Economic theory predicts that asymmetric information can lead to adverse selection in health insurance markets. Fears of adverse selection and risk selection have shaped policy-makers’ behavior around health reforms for decades. Contrary to the conventional wisdom, however, this new research found both strong evidence of multidimensional private information and advantageous selection in the Medigap market. The authors argue that selection based on risk aversion is advantageous, assuming those who are more risk averse both buy more coverage and have lower risk. The article explores the issue of advantageous selection from several perspectives and examines how it varies by income, education, future expectations and cognitive ability.
This article was sponsored in part by funding from the Economic Research Initiative on the Uninsured (ERIU), a program of the Robert Wood Johnson Foundation. The article won the 17th Annual Kenneth J. Arrow Award in Health Economics for the best paper in health economics in 2008 from the International Health Economics Association (iHEA).
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