Adverse selection death spiral in health insurance markets

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School of Business | Bachelor's thesis
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Date
2019
Major/Subject
Mcode
Degree programme
Taloustiede
Language
en
Pages
25+4
Series
Abstract
Adverse selection death spirals are a major theoretical threat in the health insurance market, causing insurance premiums to increase and insurance coverage over the population to decrease. In this thesis I provide a literary review on the subject of adverse selection death spiral. I review the theoretical concepts of asymmetric information and adverse selection behind the theory. I present the main theoretical models behind the death spiral theory by Rothschild and Stiglitz and Cutler and Zeckhauser, describing the anatomy of health insurances and the intricacies of the health insurance market. I provide a literary review on the empirical evidence supporting the death spiral theory and the evidence against the theory. Empirical evidence from the subject is however controversial. Some studies found adverse selection death spirals so severe causing insurance plans to exit the market. Other studies however found no significant evidence from adverse selection, although circumstances were optimal for the death spiral to form. Reasons suggested for the lack of adverse selection include changing customer preferences, incorrect assumption of asymmetric information, propitious selection and moral hazards affecting selection, among others.
Description
Thesis advisor
Mustonen, Mikko
Murto, Pauli
Keywords
adverse selection, death spiral, health insurance, asymmetric information
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