Claim Timing and Ex Post Adverse Selection

Many health care treatments are not urgent and may be delayed if patients so choose. Because insurance coverage is typically determined by the treatment date, individuals may have incentives to strategically delay treatments to minimize out-of-pocket costs. The strategic delay of treatment—a particular form of moral hazard— can be an important source of subsequent adverse selection, in which ex ante
identical individuals select insurance coverage based on their differing accumulation of previously delayed treatments. This paper investigates these forces empirically in the context of the missing market for dental insurance. Using rich claim-level data, my analysis reveals that approximately 40% of individuals strategically delay dental treatments when incentivized to do so, and this flexibility in delaying treatment can explain why the market for dental insurance has largely unraveled. More generally, the counterfactual
analysis suggests features such as open enrollment periods and contracting on pre-existing conditions may be helpful tools in overcoming adverse selection in insurance contexts where the timing of uncertainty is not contractible.

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