Risk selection under public health insurance with opt-out

This paper examines risk selection in a parallel public and private health insurance system in which some, but not all, individuals can purchase substitutive private insurance by opting 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 any type of selection (advantageous or adverse) when insureds are privately informed. Using the German Socio-Economic Panel, I present evidence on the selection between public and private health insurance in Germany, which is one of the countries with such a health insurance system. I find that: (1) public insurance is adversely selected, (2) individuals adversely select public insurance based on self-assessed health and advantageously select public insurance based on risk aversion, and (3) there is evidence suggesting the presence of asymmetric information between private insurers and their clients.