BLS WORKING PAPERS

U.S. DEPARTMENT OF LABOR

Bureau of Labor Statistics

 

OFFICE OF PRICES AND LIVING

CONDITIONS

Is Adverse Selection Simply Moral Hazard?

Evidence from the 1987 Medical Expenditure Survey

Ralph Bradley, U.S. Bureau of Labor Statistics

Working Paper 360

May 2002

 

All views expressed in this paper are those of the author and do not reflect the views or policies of the Bureau of

Labor Statistics.
 	

 	 
	 


 
   
	 



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References

Baumgardner, J.R. 1991 “The Interaction Between Forms of Insurance Contract and Types of Technical

Change in Medical Care,” RAND Journal of Economics 22, 36-53.

Chernew, M.E. and Frick K.D. 1999 “The Impact of Managed Care on the Existence of Equilibrium in

Health Insurance Markets,” Journal of Health Economics vol 18 573-592.

Dowd. B., Feldman R., Cassou S., and Finch M. 1991 “Health Plan Choice and the Utilization of Health

Care Services,” Review of Economics and Statistics 85-93.

Frank R.G., Glazer J., and McGuire T.G. 2000 “Measuring Adverse Selection in Managed Health Care,”

Journal of Health Economics 19 829-854.

Friedman B. and Feldstein M. 1977 “Tax Subsidies, the rational Demand for Insurance, and the Health

Care Crisis”, Journal of Public Economics, 7 155-178.

Marquis, S. and Phelps C. 1987 “Price Elasticities and Adverse Selection in the Demand for Supplemental

Insurance,” Economic Inquiry vol(25) 299-313.

Moffitt, R. 1986 “The Econometrics of Piecewise-Linear Budget Constraints,” Journal of Businesss and

Economic Statistics 317-328.

Pauly, M.V. 1968 “The Economics of Moral Hazard: Comment,” American Economic Review 58 531-537.

Rothschild, M. and Stiglitz, J. 1976 “Equilibrium in Competitive Insurance Markets: An Essay on the

Economics of Imperfect Information,” Quarterly Journal of Economics, 90(4), 630-649. 

Wolf and Godderis 1991 “Adverse Selection, Moral Hazard, and Wealth Effects in the Medigap Insurance

Market,” Journal of Health Economics 10 433-459.
Variable Mean Standard Deviation

Age 37.01 13.75

Years of Schooling 13.19 2.91

Income $21,042 $15,074

%White 77.31% 41.91%

%Male 53.96% 49.87%

% with Chronic Condition 29.64% 45.69%

% in Accident 20.09% 40.09%

Total Medical Expenditures $824.88 $2,253.71

Out of Pocket Med. Exp. $286.29 $516.73

% Uninsured 26.71% 19.58%

% Offered Employer Insurance 82.95% 37.61%

% Reject Offer 15.45% 13.06%

% Accept Offer 84.55% 13.06%

% with Non Employer Policy 6.30% 24.31%

% with No Medical Expenditures 18.13% 14.84%

N=921

Table 1

Summary Statistics

1987 National Medical Expenditures Survey
Variable Mean Standard Deviation

Age 35.73 14.54

Years of Schooling 11.93 3.23

Income $13,096 $10,625

%White 71.54% 45.21%

%Male 56.10% 49.73%

% with Chronic Condition 9.76% 29.73%

% in Accident 7.72% 26.75%

Total Medical Expenditures $199.97 $548.55

Out of Pocket Med. Exp. $192.46 $494.22

Total Health Plan Premium $1,027.69 $179.06

Individual Premium Payment $668.86 $411.77

N=246

Variable Mean Standard Deviation

Age 37.10 12.89

Years of Schooling 13.74 2.59

Income $25,754 $15,954

%White 73.84% 44.08%

%Male 54.65% 49.93%

% with Chronic Condition 34.88% 47.80%

% in Accident 22.09% 41.61%

Total Medical Expenditures $1,171.00 $3,769.20

Out of Pocket Med. Exp. $205.84 $302.79

Total Health Plan Premium $953.99 $284.98

Individual Premium Payment $158.95 $242.47

NonHospital Deductible $244.51 $324.17

NonHospital Coinsurance 12.86% 11.21%

N=172

Table 2a

Summary Statistics

for the Uninsured

Table 2b

Summary Statistics

for HMO Holders
Variable Mean Standard Deviation

Age 37.61 13.62

Years of Schooling 13.61 2.82

Income $23,316 $15,195

%White 81.31% 39.02%

%Male 52.68% 49.98%

% with Chronic Condition 37.57% 48.48%

% in Accident 25.45% 43.60%

Total Medical Expenditures $1,012.14 $2,013.63

Out of Pocket Med. Exp. $369.47 $568.68

Total Health Plan Premium $953.79 $477.38

Individual Premium Payment $148.05 $287.71

NonHospital Deductible $191.87 $165.46

NonHospital Coinsurance 16.64% 13.71%

N=503

Table 2c

Summary Statistics

for Fee for Service Holders
Table 3a

Insurance Type and 

Availability of 

Employer Insurance

Type of Insurance Yes No Total

No Insurance 12.81% 13.90% 26.71%

HMO 18.35% 0.33% 18.68%

Fee for Serivce 51.79% 2.82% 54.61%

Total 82.95% 17.05% 100%

Table 3b

Insurance Type and 

Chronic Condition

Type of Insurance Yes No Total

No Insurance 2.61% 24.10% 26.71%

HMO 6.51% 12.16% 18.68%

Fee for Serivce 34.09% 20.52% 54.61%

Total 82.95% 17.05% 100%

Table 3c

Insurance Type and 

Incidence of Accident

Type of Insurance Yes No Total

No Insurance 2.06% 24.65% 26.71%

HMO 4.13% 14.55% 18.68%

Fee for Serivce 13.90% 40.72% 54.61%

Total 82.95% 17.05% 100%

Chronic Condition

Accident Occurred

Employer Provided Insurance
Table 3d

Insurance Type and 

Zero Medical 

Expenditures

Type of Insurance Yes No Total

No Insurance 11.29% 15.42% 26.71%

HMO 1.30% 17.38% 18.68%

Fee for Serivce 5.54% 49.07% 54.61%

Total 82.95% 17.05% 100%

Zero Medical Expenditures
Table 4a

Parameter Estimates of Exogenous Adverse Selection

Parameters (x) Estimates Std. err. t-statistic Prob.|t|=0

Medical Expenditure

Constant -0.5328 0.2289 -2.328 0.0199

Age 0.7528 0.2045 3.681 0.0002

Male=1 -0.1165 0.0679 -1.714 0.0865

Years of School 0.3488 0.2223 1.569 0.1167

White=1 0.1206 0.0805 1.497 0.1344

Chronic condition 0.6671 0.0840 7.938 0.0000

Income -0.0214 0.0372 -0.576 0.5649

Accident 0.3545 0.0882 4.019 0.0001

HMO -0.0661 0.0913 -0.724 0.4690

Co-insurance cj -0.2496 0.1004 -2.486 0.0129

Insurance Demand 

Premium -2.8208 0.2544 -11.088 0.0000

Coinsurance -1.4869 0.1096 -13.565 0.0000

Deductible -4.6601 0.4773 -9.763 0.0000

Additional

Parameters

 

u

2 0.9984 0.0528 18.893 0.0000

Risk Aversion R 0.00016470108 2.9234503e-005 5.6337909 0.0000

Correlation Signal

and Medical Residual

4

0.5106 0.0613 8.332 0.0000

Mean log-likelihood -2.10094

Number of cases 921
Table 4b

Parameter Estimates of Both

Exogenous and Endogenous Adverse Selection

Parameters (x) Estimates Std. err. t-statistic Prob.|t|=0

Medical Expenditure

Constant 1.0049 0.6433 1.562 0.1183

Age 0.9919 0.2112 4.697 0.0000

male=1 -0.0852 0.0684 -1.246 0.2128

Years of School 0.8171 0.2623 3.115 0.0018

white=1 0.1431 0.0849 1.686 0.0917

chronic cond 0.7246 0.1009 7.179 0.0000

income -0.0528 0.0394 -1.341 0.1799

Accident 0.1286 0.1164 1.105 0.2690

HMO 0.1408 0.1118 1.259 0.2082

Coinsurance cj 0.1924 0.1350 1.425 0.1541

Effort -1.5076 0.4197 -3.592 0.0003

Insurance Demand 

Premium -1.8155 0.1522 -11.930 0.0000

Coinsurance -1.1647 0.0893 -13.050 0.0000

Deductible -4.5805 0.4097 -11.181 0.0000

Effort/Accident

Constant 1.2948 0.1222 10.597 0.0000

Insured (j>0) -0.8218 0.1469 -5.596 0.0000

Deductible 2.6962 0.6320 4.266 0.0000

Additional

Parameters

 

var(u) 1.0912 0.0201 54.302 0.0000

Risk Aversion R 0.00009735 5.9085e-006 16.4768 0000

Correlation Signal

and Medical Residual

4

0.7835 0.0193 40.524 0.0000

Correlation Effort

Bound and Medical

Residual 4 

-0.0580 0.1035 -0.561 0.5750

Mean log-likelihood -2.02123

Number of cases 921
Figure 1

Relationship between Random

Illness u and Effort e

ei

wi

45

wi

E(

wi

ei

E(ui |w

Uninsured

Insured