INFORMATION ASYMMETRIES AND ADVERSE SELECTION IN THE MARKET FOR INDIVIDUAL MEDICAL EXPENSE INSURANCE

This article extends the literature on adverse selection in the medica l expense insurance market. Empirical tests are conducted to determine whether low risk individuals purchase less complete individual (nongr oup) medical expense insurance than high risk individuals whose risk l evels are unobservable by the insurer. The study also investigates whe ther a separating or pooling equilibrium characterizes the individual medical insurance market and whether policy cross-subsidization from l ow to high risks occurs. Findings are consistent with the presence of adverse selection in the individual medical expense insurance market, where low and high risks purchase a pooling insurance policy and low r isks subsidize the insurance purchase of high risk insureds.