Adverse selection in a voluntary Rural Mutual Health Care health insurance scheme in China

Abstract

This study examines adverse selection in a subsidized voluntary health insurance scheme, the Rural Mutual Health Care (RMHC) scheme, in a poor rural area of China. The study was made possible by a unique longitudinal data set: the total sample includes 3492 rural residents from 1020 households. Logistic regression was employed for the data analysis.

The results show that although this subsidized scheme achieved a considerable high enrollment rate of 71% of rural residents, adverse selection still exists. In general, individuals with worse health status are more likely to enroll in RMHC than individuals with better health status. Although the household is set as the enrollment unit for the RMHC for the purpose of reducing adverse selection, nearly 1/3 of enrolled households are actually only partially enrolled. Furthermore, we found that adverse selection mainly occurs in partially enrolled households. The non-enrolled individuals in partially enrolled households have the best health status, while the enrolled individuals in partially enrolled households have the worst health status. Pre-RMHC, medical expenditure for enrolled individuals in partially enrolled households was 206.6 yuan per capita per year, which is 1.7 times as much as the pre-RMHC medical expenditure for non-enrolled individuals in partially enrolled households. The study also reveals that the pre-enrolled medical expenditure per capita per year of enrolled individuals was 9.6% higher than the pre-enrolled medical expenditure of all residents, including both enrolled and non-enrolled individuals.

In conclusion, although the subsidized RMHC scheme reached a very high enrollment rate and the household is set as the enrollment unit for the purpose of reducing adverse selection, adverse selection still exists, especially within partially enrolled households. Voluntary RMHC will not be financially sustainable if the adverse selection is not fully taken into account.

Introduction

One of the major concerns about voluntary health insurance is adverse selection. In the voluntary health insurance market, there is asymmetric information between the seller of insurance and the buyer. In particular, potential consumers know their own risk levels but insurers are unable to distinguish among risks. Therefore, high-risk consumers are able to purchase insurance at a premium that is based on a lower-risk group (or the average risk of the group). This situation is referred to as “adverse selection” (Rothschild & Stiglitz, 1976). When adverse selection exists, premiums set according to the average risk of the general population will not be sufficient to cover claims, therefore the insurance will not be financially sustainable (Cutler & Zeckhauser, 2000; Feldstein, 1993; Pauly & Nicholson, 1999).

There is substantial literature examining adverse selection in insurance markets in developed countries. These studies have been well summarized in the Handbook of Health Economics (Cutler & Zeckhauser, 2000). The list of literature on adverse selection continues to grow due to continuing efforts to study existing and newly developed insurance schemes (Batavia & DeJong, 2001; Finkelstein, 2004; Jack, 2002; Sapelli & Vial, 2003; Savage & Wright, 2003; Simon, 2005). This literature is categorized into one of following categories based on its analytical strategy: (1) examining enrollment conditional on health status, (2) examining enrollment conditional on health service utilization, (3) examining health status conditional on health insurance, and (4) examining health service utilizations conditional on insurance after controlling for moral hazard effects (Cutler & Zeckhauser, 2000). Regardless of the analytical strategy used, these studies provide evidence that adverse selection is quite significant.

Adverse selection has also been discussed extensively in Community-Based Health Insurance (CBHI) schemes in developing countries (Atim, 1998; Carrin, 2003a; Jakab & Krishnan, 2004). However, the results of empirical studies of adverse selection are mixed. A study from Zaire revealed that there was significant adverse selection for women of productive age who enrolled in a prepayment scheme for hospital care, and therefore used more hospital delivery services (Noterman, Criel, Kegels, & Isu, 1995). The results from a study in Burundi demonstrated that adverse selection was not a major problem at the individual level since “the illness occurrence as measured by episode of illness per person was almost identical for household that purchased CAM and those that did not” (CAM is a national health card insurance implemented by the government of Burundi beginning in 1984). However, there is household adverse selection since large households are more likely to join CAM as it has a fixed price irrespective of household size (Arhin, 1994). One recent study from the Philippines showed that the adverse selection does not exist in their Micro Health Insurance Units (MIUs) because the morbidities of insured and non-insured groups did not differ from each other (Dror et al., 2005). In addition, although a series of methods have been utilized to minimize adverse selection, such as making the enrollment unit the household rather than the individual and imposing a waiting time before obtaining the benefit from the insurance scheme after enrollment (Atim, 1998), the effects of these methods on the reduction of adverse selection have not been assessed empirically.

The objective of this study is to examine adverse selection in a subsidized voluntary Rural Mutual Health Care (RMHC) insurance scheme in a poor rural area of China (Hsiao et al., 2004). The hypothesis of this study is that adverse selection would not be a major problem in this scheme for two reasons. First, RMHC is a subsidized CBHI scheme. In October 2002, China announced a new funding strategy for a newly established CBHI. The government would encourage farmers to participate in the new CBHI by providing each participant with an annual subsidy of 10–20 yuan ($1.25–2.50 USD) (Liu, 2004). In order to be consistent with this government policy, RMHC was also subsidized 20 yuan per participant per year, in addition to the premium for enrollment (Hsiao et al., 2004). With this subsidy, we expect that the enrollment would be high and the scheme would be not only attractive to the high-risk residents, but also to the low-risk. Therefore, adverse selection would be minimized. Second, in order to avoid/reduce adverse selection, the RMHC enrollment unit was set at the household level rather than the individual level. We expect that adverse selection might be reduced by enrolling individuals with mixed health status if this policy could be fully implemented.