ADVERSE SELECTION IN HEALTH INSURANCE IN NIGERIA

Theoretical literature predicts that asymmetric information in insurance markets generate inefficient outcomes and literature have mostly focus on adverse selection and moral hazard caused by information advantage in insurance market. Adverse selection is the likelihood of those who anticipate more need of health care due to enhanced health risk to purchase health insurance. Therefore, this study investigates adverse selection in health insurance in Nigeria. Contract theory provided the framework for the study. The insurance-demand equation was derived from the solution to the optimality condition of insurance decision equation which gives the Marshallian insurance-demand equation. The model to measure the determinants of the demand for health insurance was a linear probability demand model. Health insurance model captured adverse selection and was estimated with probit and instrumental variable probit regressions. A positive coefficient for health status and health insurance status indicate the presence of adverse selection. Adverse selection was evident in health insurance, social and private health insurance with coefficients of 0.44, 0.25 and 0.24 respectively. Insurance income elasticity was also positive in health insurance, social health insurance and private health insurance with coefficients of 0.15, 0.23 and 0.05. There is a need for mechanisms of optimal mix of people with poor and good health status that may require working out different premium for different set of people based on the type and nature of their work and regulating the behaviour of the insured, HMO’s and health provider as health insurance market grows in