Risk Selection under Public Health Insurance with Opt-Out

This paper studies risk selection between public and private health insurance when some, but not all, individuals can opt out of otherwise mandatory public insurance. Using a theoretical model, I show that public insurance is adversely selected when insurers and insureds are symmetrically informed about health-related risks, and that there can be adverse or advantageous selection when insureds are privately informed. Using data from the German Socio-Economic Panel, I find that (i) public insurance is, on balance, adversely selected under the German public health insurance with opt out scheme, (ii) individuals advantageously select public insurance based on risk aversion and residential location, and (iii) there is suggestive evidence of asymmetric information in the market for private health insurance. Copyright © 2016 John Wiley & Sons, Ltd.