Applying copula to model healthcare demand and health insurance

Abstract

While Adverse Selection (AS) and Moral Hazard (MH) have been in the literature for over half a century, little evidence examines under what conditions AS and MH exist. This paper used copula regression, obtaining the link between the presence of insurance coverage and healthcare expenditure simultaneously, thus simultaneously determining the cases in which AS and MH exist. The data included three types of insurance, four types of expenditures, and three types of chronic conditions. Evidence suggested that employer-provided insurance and voluntary insurance showed little AS with prevalent MH, and state-subsidized insurance showed a prevalence of both AS and MH. With these findings, insurance policies can modify their policies based on the type of insurance provided, to better fit their targeted demographic.