Utilisation and Selection in an Ancillaries Health Insurance Market

I study two important aspects of the Australian private ancillaries health insurance (PAHI) market. First, I estimate the effect of PAHI on utilisation of various health services using instrumental variable methods to identify causal effects. Next I test for the presence and direction of selection effects by identifying variables not used in pricing that influence both the insurance and utilisation decision. PAHI covers a wide range of out-of-hospital health services, including many discretionary and preventative services. The most quantitatively important are dental, optometry, physiotherapy and chiropractic. I find that PAHI does increase utilisation of health services, particularly the probability of visiting a dentist, physiotherapist, chiropractor, osteopath or acupuncturist. I find evidence of selection effects in the sense that a number of different variables can predict a person's propensity to insure as well as their propensity to utilise health services. The variables that I identify generally result in adverse selection to insurers for higher frequency health services, although selection bias is more heterogeneous for lower frequency services. There is little evidence of self-selection based on the joint probability of different health services, which indicates that diversified policy menus are a possible strategy for addressing adverse selection in the PAHI market.