Modelling private health insurance choice

11 Oct 2004

Understanding why people choose health insurance and which type of cover they select is important to predicting the future of private health insurance in Australia. In this paper Mike Keane, Professor of Economics at Yale University, develops an innovative approach to modelling insurance choice, using the US experience of supplementary private insurance for the elderly. US Medicare leaves many services uncovered and requires substantial cost sharing in the form of deductibles and coinsurance. As a result, many individuals supplement Medicare benefits by purchasing fee-for-service supplements, known as 'Medigap' plans, or by joining health maintenance organisations (HMOs). This paper models choice among health plans using data from a 1988 study of the Minneapolis-St. Paul Medicare health plan market. It shows how attitudinal data can be combined with market data to provide more reliable estimates of consumers' preferences for and perceptions of health insurance plans. This results in a better model. Quality of health plan is important in determining consumer choice. Misperceptions of cost sharing arrangements in both Medicare and supplementary insurance are common.

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