Adverse selection Test in Iran's Basic Health Insurance Market

Adverse selection appear when insured persons have information about their risk that is not observed by insurers. Under these circumstances, insurers are unable to identify customer risk and they are forced to offer the same contract based on the average of all their customers. It is clear that offering such a similar contract will be relatively more attractive to high-risk customers. In contrast, it is not very pleasant for customers who have less risk. This will gradually drive low-risk customers out of the insurance industry. The end result will be that such a situation will prevent a stable balance in the market and it allows the market to collapse completely. In the present study, the phenomenon of adverse selection, which is one of the side effects of asymmetric information, in the basic health insurance market in Iran, it has been studied and tested. To test the research hypothesis, that is, to confirm the existence of an adverse selection, household budget data between 1993 and 1994 have been used. Attempts have been made to make the model under the least parametric assumptions, to be able to test adverse selection in health insurance. Also, unlike all previous models, the uncertainty of repayment and its amount was considered in this model, which is much more consistent with reality. The results confirm the adverse selection in health insurance, health care and social security in Iran.