Adverse Selection and Moral Hazards in Supplementary Health Insurance

The purpose of this study was to investigate the existence of two phenomena of adverse selection and moral hazards in the Iranian supplementary health insurance market.

First, a demand model for the use of complementary health care services was defined under the least assumptions about how the insurance companies repay the policy, the distribution of the hidden health status of hospital clients and also the type of their supplementary insurance despite the two phenomena of unfavorable choise and moral hazards. The main model was estimated from GMM method and the existence of these two phenomena was tested using non-parametric statistical methods. The data used in this study were collected through a questionnaire and randomly from clients of 11 hospitals in the two groups of supplementary and uninsured treatment in Tehran.

The results showed that risk aversion for the consumption of health services is more than the consumption of composite goods and this amount is more for the insured than the uninsured, which indicates the low health status of the insured compared to other people. The Kolmogorov-Smirnov test also confirmed the different health distributions of the two groups. In addition, according to the results, there are small moral hazards in the insurance market. Moral hazards are lower for people with higher incomes, and the more insurance is demanded from people with higher incomes, the lower the moral hazards will be, and the lower the health of a person, the greater the moral hazards.

The results confirm the existence of adverse selection and moral hazards in complementary health insurance in Iran.