Abstract
In the last few decades, private health insurance rates have declined in many countries. In countries and states with community rating, a major cause is adverse selection. In order to address age-based adverse selection, Australia has recently begun a novel approach which imposes stiff penalties for buying private insurance later in life, when expected costs are higher. In this paper, we analyze Australia’s Lifetime Cover in the context of a modified version of the Rothschild-Stiglitz insurance model (Rothschild and Stiglitz, 1976). We allow empirically-based probabilities to increase by age for low-risk types. The model highlights the shortcomings of the Australian plan. Based on empirically-based probabilities of illness, we predict that Lifetime Cover will not arrest adverse selection. The model has many policy implications for government regulation encouraging long-term health coverage.
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Brown, H.S., Connelly, L.B. Lifetime Cover in Private Insurance Markets. Int J Health Care Finance Econ 5, 75–88 (2005). https://doi.org/10.1007/s10754-005-6602-6
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DOI: https://doi.org/10.1007/s10754-005-6602-6