Disentangling Moral Hazard and Adverse Selection in Private Health Insurance

Moral hazard and adverse selection create inefficiencies in private health insurance markets and understanding the relative importance of each factor is critical for policy. We use claims data from a large rm which changed health insurance plan options to isolate moral hazard from plan selection. Using an instrumental variables quantile re-gression approach, we estimate the differential causal impact of each health insurance plan on the entire distribution of medical expenditures. We account for systematic sample attrition during the sample period by conditioning on a nonseparable sample selection adjustment. Our estimates imply that 54 % of the additional medical spending observed in the most generous plan in our data relative to the least generous is due to moral hazard with the other 46 % due to adverse selection. We also statistically reject that individuals are responding solely to a specic parameterized price in their health insurance plans