Disentangling incentives effects of insurance coverage from adverse selection in the case of drug expenditure: a finite mixture approach

This paper takes a finite mixture approach to model heterogeneity in incentive and selection effects of drug coverage on total drug expenditure among the Medicare elderly US population. Evidence is found that the positive drug expenditures of the elderly population can be decomposed into two groups different in the identified selection effects and interpreted as relatively healthy with lower average expenditures and relatively unhealthy with higher average expenditures, accounting for approximately 25 and 75% of the population, respectively. Adverse selection into drug insurance appears to be strong for the higher expenditure component and weak for the lower expenditure group. Copyright © 2010 John Wiley & Sons, Ltd.