The demand for health insurance and behavioural economics

Excerpt

A vast amount of traditional economic literature [e.g. 2, 13, 20] describes the advantages and disadvantages of taking out health insurance. The major advantage of insurance is the reduction of uncertainty regarding financial losses [12]. The welfare gain from this uncertainty reduction depends on the individual’s degree of risk aversion [14], which is affected by the presence of background risks (i.e. risks that cannot be avoided or insured against, such as labour income risks). Several studies show that background risks to wealth makes risk averse individuals behave in a more risk averse way with respect to any other independent risk [e.g. 5]. This concept is called risk vulnerability [8], and causes insured to reduce their exposure to avoidable risks, for instance by increasing their insurance demand [9]. Another advantage of health insurance is that it provides access to healthcare services that would otherwise be unaffordable [12]. The disadvantages of insurance are moral hazard, the loading fee and the transaction costs related to purchasing the insurance and handling the claims. The literature shows that full insurance is far from optimal and that a mix between coverage and cost sharing is preferred. Optimal designs of health insurance (1) protect individuals against unpredictable high financial risks, (2) provide access to otherwise unaffordable healthcare services, (3) include first-dollar cost sharing, and (4) incorporate individual caps on out-of-pocket expenses [4] (see Table 1). In practice, however, insurance design does not always comply with these principles. An obvious example concerns the Dutch supplementary health insurance (SHI). As we will explain below, the Dutch SHI substantially deviates from the optimal design. It is therefore surprising to observe the popularity of this scheme: 84 % of the Dutch insured took out SHI in 2015. This intriguing paradox suggests that additional aspects––compared to those mentioned in the traditional economic literature––may play a role in the demand for health insurance. After a short description of the Dutch SHI, we will discuss a series of potential explanations for the high uptake of “suboptimal” insurance stemming from key insights described in the behavioural economic literature. …