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Is Adverse Selection Simply Moral Hazard? Evidence from the 1987 Medical Expenditure Survey

Ralph Bradley


There continues to be a lack of consensus about the presence of adverse selection in health plan markets. Previous studies conducted tests using data that covered only a certain segment of the entire population, and none modeled the role that risk aversion plays in the selection of plans. Additionally, none of these studies accounted for the possibility that the probability distribution of future illness could depend on unobserved "preventative" choices made by the policyholder. This study accounts for these characteristics and finds that not only is adverse selection present, but that there is an additional market failure since individuals are not fully compensated for their efforts at preventing both illness and accidents.