Community Rating and the Cost of Adverse Selection: Evidence from Australia

The regulation of health insurance is an important and often controversial issue. Rules intended to improve access to insurance for high risk consumer have the potential to reduce overall coverage by inducing adverse selection. This paper examines the issue of adverse selection in the context of the market for private health insurance in Australia, where premiums are required to be community rated. In 2000, the Australian government reformed the community rating rules in an effort to reverse a long decline in private insurance coverage by attracting a greater number of younger consumers into the market. I estimate the cost of adverse selection prior to this reform and evaluate the effect of the policy on the composition of the private insurance risk pool and on the main determinant of premiums, benefits paid by insurers. JEL Nos. D82, I11, I18