Opt Out or Top Up? Voluntary Healthcare Insurance and the Public vs. Private Substitution

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1 D I S C U S S I O N P A P E R S E R I E S IZA DP No Opt Out or Top Up? Voluntary Healthcare Insurance and the Publc vs. Prvate Substtuton Danele Fabbr Chara Monfardn September 2011 Forschungsnsttut zur Zukunft der Arbet Insttute for the Study of Labor

2 Opt Out or Top Up? Voluntary Healthcare Insurance and the Publc vs. Prvate Substtuton Danele Fabbr Unversty of Bologna, CHILD and HEDG Chara Monfardn Unversty of Bologna, CHILD, HEDG and IZA Dscusson Paper No September 2011 IZA P.O. Box Bonn Germany Phone: Fax: E-mal: Any opnons expressed here are those of the author(s) and not those of IZA. Research publshed n ths seres may nclude vews on polcy, but the nsttute tself takes no nsttutonal polcy postons. The Insttute for the Study of Labor (IZA) n Bonn s a local and vrtual nternatonal research center and a place of communcaton between scence, poltcs and busness. IZA s an ndependent nonproft organzaton supported by Deutsche Post Foundaton. The center s assocated wth the Unversty of Bonn and offers a stmulatng research envronment through ts nternatonal network, workshops and conferences, data servce, project support, research vsts and doctoral program. IZA engages n () orgnal and nternatonally compettve research n all felds of labor economcs, () development of polcy concepts, and () dssemnaton of research results and concepts to the nterested publc. IZA Dscusson Papers often represent prelmnary work and are crculated to encourage dscusson. Ctaton of such a paper should account for ts provsonal character. A revsed verson may be avalable drectly from the author.

3 IZA Dscusson Paper No September 2011 ABSTRACT Opt Out or Top Up? Voluntary Healthcare Insurance and the Publc vs. Prvate Substtuton * We nvestgate whether people enrolled nto voluntary health nsurance (VHI) substtute publc consumpton wth prvate (opt out) or just enlarge ther prvate consumpton, wthout reducng relance upon publc provsons (top up). We study the case of Italy, where a mxed nsurance system s n place. To ths purpose, we specfy a jont model for publc and prvate specalst vsts counts, and allow for dfferent degrees of endogenous supplementary nsurance coverage, lookng at the nsurance coverage as drven by a trnomal choce process. We dsentangle the effect of ncome and wealth by gong through two channels: the drect mpact on the demand for healthcare and that due to selecton nto VHI. We fnd evdence of optng out: rcher and wealther ndvduals consume more prvate servces and concomtantly reduce those servces publcly provded through selecton nto for-proft VHI. These results mply that the market for VHI eases the redstrbuton from hgh ncome (doubly nsured) ndvduals to low ncome (not doubly nsured) ones operated by the Italan Natonal Health Servce (NHS). Accountng for VHI endogenety n the jont model of the two counts s crucal to ths concluson. JEL Classfcaton: C34, C35, D12, H44, I11 Keywords: publc provson of prvate goods, health nsurance, bvarate count data model, endogenous multnomal treatment, smultaneous equaton modelng Correspondng author: Chara Monfardn Department of Economcs Unversty of Bologna Pazza Scaravll Bologna Italy E-mal: chara.monfardn@unbo.t * We are grateful to Francesca Bargozz, Partha Deb, Smona Grass, Astrd Kl, Thomas Lfkn, Owen O'Donnell, Pravn Trved and partcpants of semnars n Lausanne, Darmstadt, and Ithaca (ASHE- 2010) for useful comments and suggestons. Usual dsclamers apply.

4 1. INTRODUCTION The approprate relatve szes and roles of publc and prvate sectors n fnancng healthcare are under debate n many countres. Countres that rely upon publc fnancng are consderng an expanded role for prvate healthcare fnance as a way to reduce pressure on publc budgets. Ths push, qute often, comes through a carrot-and-stck strategy. Reducton n coverage by statutory health nsurance (SHI) and ncreased relance on ratonng-bywatng force ndvduals to seek care n the prvate market. Besley et al. (1999) suggest that watng tme to access publc provsons s a relevant determnant of the demand for voluntary health nsurance (VHI) n England (see also Foubster et al. (2006)). Aarbu (2010) ndcates ths as the mechansm behnd the rapd ncrease n prvate nsurance coverage n Norway. At the same tme, relaxng regulatons on access to prvate health nsurance and ntroducng tax deductons and ncentves to buy supplementary coverage mght ease the process. Recently, n Canada a 2005 Supreme Court decson abolshed a law prohbtng complementary prvate nsurance (Cuff et al. (2010)). Srvastava and Zhao (2008) document that Australa, n the late nnetes, ntroduced several ncentves and penaltes to stem eroson n VHI. Smlarly, a large use of tax ncentves for the purchase of VHI s observed n Portugal, snce 1999, and Ireland, snce the 1970s (see Mossalos and Thomson (2004)). However, concerns about tax ncentves, to promote the take-up of VHI, beng regressve, expensve and neffectve n stmulatng demand, led, n recent years, to a clear trend towards abolshng or reducng ther use. Tax ncentves are, qute lkely, to be regressve, provded that subscrbers, most of the tme, are n the upper tal of ncome dstrbuton. Ths effect s even larger f, as noted by Daves (1999), tax relef s appled at the margnal tax rate. Moreover, effectveness s also questonable whenever ncentves compensate ndvduals, wth VHI that may be payng for better amentes, wthout reducng ther consumpton of statutory healthcare. Mossalos and Thomson (2004) notce that reducton n tax ncentves, devoted to encouragng VHI, occurred n Austra, Greece, Ireland, Italy, Span and the UK. Ths polcy debate centers on two general arguments. Advocates of parallel prvate fnance, argue that ncreasng prvate fnancng n healthcare can be benefcal to socety: t would reduce demand pressure on the publc provsons thus freeng resources to mprove qualty and to ease access to needed care. Opponents, on the other hand, dspute that prvate 2

5 fnance, by drawng resources away from the publcly fnanced system, would produce exactly the opposte. Much of the ssue stands along the emprcal value of the Besley and Coate (1991) conjecture. Accordng to t, the publc provson of healthcare can work as a redstrbutve devce, whenever low ncome ctzens choose the publcly provded good, whle hgh ncome ctzens, who contrbute to subsdzng the publc supply through ncome taxes, decde to opt out to the prvate sector. VHI mght strengthen the redstrbutve role played by the SHI, as far as rcher ndvduals are also more nclned to buy supplementary health nsurance, thus, beng less cost conscous when they consume prvate healthcare supplements. We nvestgate the redstrbutve role of VHI n Italy, where a promnent share of the healthcare supply s publcly provded by the Natonal Health Servce (NHS), and about 21% of the populaton s covered by some form of VHI. Our research queston s, whether people enrolled nto VHI substtute publc consumpton wth prvate (.e. opt out) or, alternatvely, they just enlarge ther prvate consumpton, wthout reducng relance upon publc provsons, (.e. top up). To ths purpose, we model the jont demand for publc and prvate healthcare vsts, accountng for the endogenety of health nsurance status. We consder dfferent degrees of endogenous supplementary nsurance coverage, lookng at t as drven by a trnomal choce process. We dstngush between not-for-proft (NFP) VHI and for proft (FP) VHI. The resultng modelng framework s a smultaneous equaton system wth multnomal endogenous treatment. Ths represents a contrbuton to the lterature on count data models whch has ether developed methods to address the endogenety of a multnomal treatment n a sngle equaton approach (see, for example, Deb and Trved (2006), for a smulaton based classcal estmaton approach, or Munkn and Trved (2008), for a Bayesan analyss) or has jontly specfed multple equatons sharng a common bnary endogenous varable (see, for example, Zmmer and Trved (2006), for a Copula based estmaton, or Cha Cheng and Vahd (2010), for a smulaton based classcal estmaton approach). Our generalzaton to multple equatons s of partcular relevance. Snce the nsurance regressors are endogenous n both count equatons, gnorng ther bvarate nature and estmatng separately two unvarate counts wth endogenous treatment would lead to nvald nference on the treatment effects and other parameters of nterest. We fnd that havng FP VHI coverage ncreases the demand for prvate vsts, concomtantly reducng demand for publc vsts. The substtuton effect prevals on the 3

6 drect effect exerted by ncome and wealth on healthcare consumpton. Ths mples that the better-off ndvduals, who more frequently buy VHI coverage, opt out of the publc provson, so that the Italan NHS redstrbutes, from hgh ncome to low ncome ndvduals, through the operaton of the VHI market. We prove that selecton effects nto VHI, due to unobservables, are substantal n our case study. Allowng for the endogenety of nsurance status s crucal for the nference on healthcare nsurance effects and other key parameters on whch the answer to our research queston reles. Under exogenety, the results would mply the opposte concluson that the more affluent ndvduals top up rather than opt out. The paper s organzed as follows. The next secton presents the econometrc model. Secton 3 provdes a concse nsttutonal background on the Italan NHS, the market for voluntary nsurance and the market for physcan care n Italy, ntroducng at the same tme the dependent varables of our model. Secton 4 descrbes the data. Secton 5 presents the emprcal specfcaton and llustrates the estmaton results. Secton 6 concludes. 2. A BIVARIATE COUNT DATA MODEL WITH ENDOGENOUS MULTINOMIAL TREATMENT Our econometrc model comprses two blocks of equatons: a trnomal nsurance choce model (treatment equatons), and a bvarate count data model for the PUBLIC and PRIVATE vst (outcome equatons), n whch the nsurance status s allowed to be endogenously determned. We follow the approach of Deb and Trved (2006), and account for self-selecton nto nsurance status by resortng to a latent factor structure. However, we extend ther model, whch ncludes a sngle outcome equaton, to the case of the jont modelng of two outcome equatons. From the economc sde, ths bvarate SURE framework s nvoked by our man research queston, amed at measurng to what extent, beng prvately nsured leads to a substtuton of publc wth prvate consumpton. From the econometrc perspectve, our bvarate model wth endogenous treatment represents the proper settng for vald nference. Indeed, when multple outcomes are smultaneously determned and there s a common endogenous varable, reducton to a sngle equaton model wth endogenous regressor leads to nconsstent estmates of the treatment effects and other parameters of nterests n the outcome equaton. In our case study, publc and prvate vst count equatons are certanly lnked va correlaton of unobservable factors - such as the fralty condton- that cannot be completely controlled for wth ndvdual 4

7 characterstcs avalable n the data (Fabbr and Monfardn (2009) fnd a postve resdual correlaton between the two health outcomes). Let y h = 0, 1, 2,. be the number of vsts of type h consumed by the ndvdual, wth h=pub, PRIV, and let the d j bnary varables ndcatng whether the ndvdual chooses the j-th nsurance status alternatve (d j =1 f alternatve j s chosen; d j =0 otherwse), where the set of mutually exclusve nsurance statuses s gven by: j = 0: no VHI (only statutory health nsurance); j = 1: NFP VHI ONLY (doubly nsured wth NFP VHI only); j = 2: FP VHI (doubly nsured wth FP VHI and possbly NFP VHI) 1. The ndrect utltes, assocated wth the three alternatves, are defned as: u u u = w α + η ' ' ' = w α + δ l 1 1 = w α + δ l η 1 + η2, where w s a set of ndvdual specfc regressors, η j are..d and follow a type 1 extreme value dstrbuton (leadng to multnomal logt model), l 1 s a latent factor representng unobserved tastes for voluntary nsurance, standard normal..d. and ndependent of η j. For dentfcaton we restrct α = 0 0,.e. j=0 s made the reference state, and we set δ =δ 1 2 = 1 to normalze the scale of the latent factor. Notce that ths structure makes the composte errors, of the utltes assocated to alternatves 1 (NFP VHI) and 2 (FP VHI), correlated va the common error component l 1. Ths s a reasonable pattern, snce alternatves 1 and 2 encompass a common choce,.e. not-for-proft nsurance can be owned smultaneously wth a prvate one. 2 The assumptons above defne the followng mxed multnomal logt structure for the nsurance status probabltes: 1 We are forced to collapse the doubly nsured wth both FP and NFP VHI nto ths class snce the former group represents only the 2.4% of our sample. 2 Another possblty would be to estmate a free correlaton parameter between utltes assocated to alternatves 1 and 2. However, dentfcaton of ths parameter requres alternatve specfc regressors that are not avalable n our case study. 5

8 Pr( d Pr( d 0 j = 1 w, l = 1 w, l 1 1 ) = 1+ m= 1,2 1 ' exp( w α ' exp( wα j + l 1) ) = ' 1+ exp( w α + l m= 1,2 m m + l 1 1 ) ) j = 1, 2 Comng to the outcomes block of the model, we use a Posson-Normal mxture, assumng that each count y h h=pub, PRIV, s ndependently drven by a Posson process, condtonally to the vector of covarates z,, d1 d2 and to the couple of latent factors l 1, l 2 ; where the second unobservable factor 2 l s normal..d and ndependent of l 1 : 3 exp( µ h ) µ h f h ( yh z, d1, d2, l 1, l 2 ) = y! h yh h = PUB, PRI The condtonal means of the two Posson processes are: ' µ h = E( yh z, d1, d2, l 1, l 2 ) = exp( zβ Zh + β1 hd1 + β2hd2 + λ1 hl 1 + λ2hl 2 ) Snce both latent factors are heterogenety components common to the two counts, they are the source of ther smultaneous determnaton. The frst component, l 1, captures selecton effects nto nsurance choce: an agent mght choose to own any supplementary nsurance based on unobservables that also determne smultaneously hs choce of publc versus prvate health care. Therefore, the parameters λ 1h measure the covarance between the unobservables, enterng the utlty assocated to supplementary nsurance choces, and the expected vst consumpton h. A postve λ 1PRIV mples that unobservables ncreasng the probablty of choosng a voluntary nsurance - ether not-for-proft or for-proft - wll also ncrease prvate vst consumpton. A smlar nterpretaton apples to λ 1PUB. The second component, l 2, captures co-movements n publc and prvate vst counts that are not channeled through nsurance choce behavor. We set λ 2 PUB = 0 snce only one of the parameters λ 2h s dentfed, so that 2 PRIV λ wll measure the covarance between PUB and 3 We mx the normal latent factor wth a Posson dstrbuton rather than a Negatve Bnomal one. In ths way we avod a further overdsperson source n the model besdes that arsng from the latent factor. We expermented problems n dentfyng the addtonal overdsperson parameter when usng a normal-nb mxture. We are grateful to Partha Deb for pontng out, to us, ths problem. 6

9 PRIV vsts, condtonal on observables characterstcs z and nsurance status. Ths framework allows us to dsentangle the nsurance treatment effects on vsts of type h, β, β 1 h 1h, from the possble selecton effect for the two types of vsts (adverse or postve selecton on unobservables). The model encompasses a bvarate count model wth exogenous nsurance, when λ 1 PRIV = λ1pub = 0. Gven that the two counts are ndependent, condtonally on the latent factors, ther bvarate jont dstrbuton s gven by: f ( y z, d, l ; β, λ) = h h ( PUB, PRI ) f ( y h z, d 1, d2, l 1, l 2 ), where vectors β, λ collect the parameters of both the publc vsts and the prvate vsts equatons, and d ( = d1, d ) 2, l = ( l 1, l 2). Let us ntroduce the short notaton, Pr( d w, l 1), for the mxed logt probabltes of treatment ntroduced above. The lkelhood of the model s derved wth two steps. Frst, condtonally on the latent factor, the jont dstrbuton of nsurance and vst count varables s obtaned from the usual condtonal by margnal densty factorzaton. Second, the unobserved latent factors are ntegrated out: = f ( y z, d, l ) Pr( d w, l ) h( l ) dl Pr( y, d w, z ) 1 = = f h h ( PUB, PRI ) ( y h z, d, l ) Pr( d w, l ) h( l ) dl Snce the ntegral above has not closed soluton, estmaton s performed by maxmzng a Smulated Lkelhood (Goureroux and Monfort (1996)), whch approxmates the expected value wth an average over R pseudo-random draws: L R = 1 R R f h r= 1 h ( PUB, PRI ) ( y h z, d, l r ) Pr( d w, l ) r The resultng Smulated Maxmum Lkelhood Estmator s close to the MLE provded R s suffcently large. We follow the gudelnes whch emerged from the lterature concernng the use of Halton sequences, rather than pseudo-random values, n order to reduce the 7

10 varance of the smulated lkelhood and to speed up convergence (Bhat (2001); Tran (2002)). We fnd that R=2000 leads to stable results, corroboratng the experence of other research on models nvolvng endogenous dummes lke ours (see Deb and Trved (2006)). Both the generaton of the Halton sequences, and the maxmzaton of the smulated lkelhood have been performed wthn STATA 11 (lf method). The Posson specfcaton we adopt for modelng the vst processes s qute convenent for analyzng treatment effects and demand elastctes. When the mean functon s lke µ = E( y x) = exp( γ ' x), the elastcty of the count, wth respect to a contnuous varable regressor x k, s gven by: E( y x) k ε k = * = γ k xk E( y x) x x k. The evaluaton of the treatment effect of each nsurance dummy amounts, nstead, to a sem-elastcty and s gven by the correspondng coeffcent. 3. THE BACKGROUND OF OUR CASE STUDY In ths secton we present basc nsttutonal backgrounds on the Italan NHS, the market for VHI and the market for specalst consultatons. We refer to the stuaton prevalng n the year 2000, for whch we conduct our emprcal exercse. Despte major reforms whch took place thereafter, most of the features referred to the market for nsurance and those for consultatons are stll vald THE ITALIAN NHS The Italan NHS provdes comprehensve statutory nsurance and unform healthcare to the entre populaton. Under the Italan Consttuton, the State has exclusve power to set the "essental levels of care" to be made avalable to all resdents throughout the country. Regons have exclusve responsblty for the organzaton and admnstraton of publcly fnanced healthcare. NHS s manly fnanced by general taxaton. Funds are transferred from the central government to each regon, accordng to a captaton rule, and then reallocated among approxmately 200 Local Health Authortes (LHAs). Wthn ts budget, each LHA s responsble for fnancng healthcare consumpton of the "enrolled" populaton, beng also (manly) responsble for healthcare producton. Dependng on a ctzen's ncome, age and health condton, co-payments are also charged for drugs, out-patent treatments, 8

11 some dagnostc and laboratory tests, and medcal applances. The poltcal allocaton rules for publc healthcare provsons wll necessarly leave some people, those at the extremes of the preference dstrbuton, unsatsfed. Publcly-fnanced natonal health servces, almost nevtably, generate a wllngness to pay for addtonal prvate servces, whose consumpton opportuntes mght be enlarged by way of VHI underwrtng. Notce that n the Italan NHS there s no way to unsubscrbe from the SHI, as n Germany, for nstance, so that "ends aganst the mddle" equlbrum (Epple and Romano (1996)) cannot emerge except through an mpovershment of publc supply THE MARKET FOR INSURANCE Accordng to Italan law, ctzens can enlarge ther SHI coverage n two ways: buyng a VHI polcy suppled n the commercal nsurance market (FP VHI) and obtanng some addtonal coverage by jonng nto a mutual nsurance company (NFP VHI). Mutual nsurance companes are entrely owned by ther polcyholders. Group soldarty, lmted proft sharng, absence of shares and free membershp are ther dstnct trats. These two types of VHI play a mxed role wth respect to the SHI. Both of them grant coverage for consumpton of "complementary" and "supplementary" types of provsons. Accordng to common defntons n the lterature, a provson s sad to be complementary f t refers to servces already provded by the SHI, whle t s sad to be supplementary f t s not granted under the SHI polcy. Both markets are almost completely unregulated except for some requrements concernng fnancal stablty. Despte the types of provsons whch are not qualtatvely dfferent, coverage granted by FP VHI s larger and more complete. Contrbutons and premums are concomtantly hgher n FP plans. In the year 2000, the average contrbuton to mutual nsurances was about 290 Euros per year, rangng from a mnmum of about 85 to a maxmum of 660. Correspondng fgures n the FP VHI plans are about 995 Euros (mnmum 500 and maxmum 2400). Insert Table 1 here Table 1 dsplays the dstrbuton of health nsurance status n our sample, whch comes from ''Indagne Statstca Multscopo sulle Famgle: condzon d salute e rcorso a servz santar '', conducted by the Italan Natonal Insttute of Statstcs, ISTAT, and t s representatve of Italan males, aged above 18 (see Secton 4, for a descrpton of our sample selecton crtera). Despte the fact that the vast majorty of the ndvduals, 9

12 amountng to 79%, s covered only from SHI, the shares of people resortng to VHI, ether NFP or FP s consderable (9.6% and 11.4%, respectvely) THE MARKET FOR SPECIALISTS' VISITS The Italan NHS plays a major role n the market for specalst consultatons where, publc, closely regulated and manly salared specalsts, compete wth prvate, less strctly regulated ones. Specalzed NHS out-patent servces, ncludng vsts, dagnostcs and treatment, are provded, ether by the LHA s salared specalsts or by accredted publc and prvate facltes, wth whch the LHA has agreements and contracts. A co-payment, dscretonary for each regon up to a celng determned by natonal law, s requred. Snce these celngs are well below the market clearng level, queues of patents form, and supply s ratoned. Because of watng lsts, co-payments and unsatsfactory qualty, many patents seek care outsde the NHS, resortng to the prvate market for specalst care. Ths market s qute well developed. Prvate specalsts are subject to an authorzaton, based on mnmum standard requrements, whch turn out to be very loose ndeed. Fees, qualty and most other relevant features of prvate medcal practces are manly subject to market forces. As a result, t s generally true that the prvate alternatve to NHS supply s hgher prced and, for the class of specalst vsts we consder here,.e. excludng hosptal out-patent vsts, of better qualty. Insert Table 2 here Table 2 shows the two publc and prvate vsts counts that wll be the key dependent varables n our model. They nclude all the specalst consultatons except dental care, aggregated nto a sngle class of vsts wthn each type of provder, and consumed n the span of a month. Low partcpaton rates (5.5% for publc vst, 4.6% for prvate ones) are therefore mpled TAX DEDUCTION Concernng tax ncentves, n the year % of the contrbutons to NFP VHI were tax deductble up to a celng of 1200 Euro, at the ndvdual average tax rate. No deducton was granted for premums pad to a FP VHI plan and ths s, currently, stll the case. At the same tme, notce that 19% of the cumulated out-of-pocket (OOP) payments above a mnmum of about 110 Euros, s tax deductble. For those covered by a FP VHI, deducton 10

13 s granted also for the part of OOP payments that have already been refunded by the nsurance company. Ths arrangement tends to produce an ncentve to adversely select nto FP VHI. Fral ndvduals, those who foresee themselves consumng more, would receve the same tax ncentve to subscrbe a NFP VHI as the healther ndvduals. Whle tax deducton for OOP payments, on top of FP VHI refunds, makes these plans more attractve for the unhealthy, rather than for the healther, subscrbers. 4. DATA Data come from ''Indagne Statstca Multscopo sulle Famgle: condzon d salute e rcorso a servz santar conducted by ISTAT. We use the survey whch s the most recent avalable cross-secton where nformaton on an ndvdual's nsurance status s collected. The full sample contans 52,332 households (140,011 ndvduals). The survey focuses on ndvdual healthcare consumpton n the 4 weeks before the ntervew. Indvduals are also asked about the amount of money pad out-of-pocket and watng tme for obtanng ther last vst. In our data the nsurance status s defned as ndvdual coverage from prvate VHI. We restrct our analyss to male householders (HH), aged 18 or above (38,719 observatons). In ths sample, coverage and ownershp both tend to concde. We also drop ndvduals that are hardly nsurable: those above 70 years of age, and those affected by severe chronc condtons (Parknson's dsease, mental and nervous dseases). Fnally, we select out observatons wth degenerate values on INCOME and mssng values on FEES (see the regressors' descrpton below n Secton 5), and are left wth a fnal estmaton sample made up of 27,945 observatons. Insert Table 3 here Table 3 provdes a prevew on the relatonshp between nsurance status and healthcare consumpton. The overall consumpton proves to be qute homogenous across the three groups. What clearly matters s the composton n publc versus prvate provson; the larger s coverage, the lower s relance upon publc provson and, concomtantly larger, s the use of prvately suppled vsts. Ths pattern s confrmed by the margnal effects of beng covered by each class of VHI on the average consumpton of vsts, estmated wth no controls and reported n the lower part of the table. 11

14 5. EMPIRICAL SPECIFICATION AND RESULTS 5.1. REGRESSORS Our specfcaton of the nsurance choce and the vst count models reles upon Fabbr and Monfardn (2009). It fully explots the rch set of nformaton avalable n the ISTAT dataset descrbed above and comprses most covarates that are used n emprcal analyses of healthcare consumpton wth endogenous nsurance (e.g. Cameron and Trved (1988); Holly et al. (1998); Buchmuller et al. (2004); Deb and Trved (2006); Munkn and Trved (2008)). The block of regressors, whch s common to the nsurance and the utlzaton equatons (or enter only the latter and therefore do not play any role for dentfcaton of the nsurance dummes coeffcents), conssts of the followng sets of varables. Health condtons varables, amed at measurng ndvdual rsk factors, nclude: EXEMPT, a dummy dentfyng those ndvduals who are enttled to free publc specalst vsts due to health or economc status; measures of chronc condtons or physcal lmtatons such as INVALID, CHRONIC (dummy), NCHRONIC (number of chronc condtons), LIM ADL (dummy ndcatng lmtatons n the daly actvtes; SRH good, a dummy ndcatng whether the self-perceved general health status s declared to be good or very good. The set of soco-demographcs covarates conssts of a quadratc specfcaton for AGE, a dummy dentfyng MARRIED ndvduals, and two educaton dummes: MEDIUM EDUC (f the person holds a secondary school certfcate), HIGH EDUC (f he/she holds a unversty degree). We also nsert nformaton on employment status and professonal poston, that mght drve the nsurance choce and at the same tme capture dfferences n the ndvdual value of tme, through the dummy varables EMPLOYED, SELF-EMPL (self-employment), HIGH POSITION (hgh professonal poston), HIGH POSITION as SELF-EMPL (hgh poston n self-employment). Indvdual economc varables, enterng both the nsurance and the utlzaton equaton, comprse a dummy, ndcatng HOME OWNERSHIP and the household dsposable INCOME. 4 An mportant group of regressors s, nstead, measured at the level of the Local Health Authorty (LHA), whch s taken as the proper relevant market area for medcal 4 Ths measure s derved from a matchng exercse performed by the Italan Natonal Statstcal Insttute, as the ISMF survey does not have data on household ncome. By regresson matchng, each household n the sample was assgned the mputed after-tax monthly ncome, estmated usng data from the Survey on Household Income and Wealth, conducted by the Bank of Italy. Ths measure s then equalzed and deflated wth household monthly food expendture at LHA level (see Fabbr and Monfardn (2009)). 12

15 consultaton. For a detaled descrpton of these measures, see Fabbr and Monfardn (2009), where they have been proposed and developed. A frst subset of such regressors s common to both nsurance and vsts equatons and captures the overall qualty and avalablty of healthcare servces suppled by the LHA. These varables nclude the publc expendture per-capta n the LHA, PUBLIC EXP; the PHYSICIAN DENSITY, provdng a measure of the avalablty of doctors n the local area; the watng tme to access the two dfferent types of consultaton (we nsert both varables WAIT PUBLIC and WAIT PRIVATE n the vst equaton 5 and a dummy ndcatng f the watng tme for publc s greater than that for a prvate vst, HIGH DIFF IN WAIT n the nsurance model). A second subset of varables, at the LHA level, enters the vst equatons only. Ths s meant to control for equlbrum condtons n the local healthcare market. Among these varables, we nclude publc and prvate vst fees faced by consumers, FEE PUBLIC and FEE PRIVATE; the PRICE of a NON-FOOD BUNDLE (whch s needed to fulfll the requrements of a coherent, ncomplete system of demand); Fnally, to better descrbe the context n whch the agents make ther choces and to control for other sources of geographcal varaton n healthcare and nsurance markets we nsert geographcal fxed effect n the form of regonal dummes, and a dummy for ndvdual resdng n provncal captal, CHIEF TOWN EXCLUSION RESTRICTIONS The key regressors of the two vst equatons, are the treatment varables represented by the nsurance dummes: NFP VHI only and FP VHI. To deal wth ther endogenety and to acheve dentfcaton of the assocated causal parameters n the outcome equatons, we rely upon a set of excluson restrctons. We propose a set of nstrumental varables that are determnants of the nsurance choce but plausbly do not enter the utlzaton part of the model under the specfcaton outlned above. 6 The frst source of excluson restrctons we rely upon s qute uncommon n ths stream of emprcal studes. We take advantage of the avalablty of ndvdual premums pad for FP VHI n another Italan survey, SHIW (Survey on Household Income and Wealth), conducted by the Bank of Italy. Adoptng a regresson matchng procedure, we generate the premum that each ndvdual of our 5 Fabbr and Monfardn (2009) argue that, usng the full vector of LHA specfc watng tmes allows to control for the probablty of data truncaton. Indeed, due to the four week recall perod, we mght fal to observe the full record of ndvdual vsts related to a sngle spell of llness. 6 These nstrumental varables are needed beyond the non-lnear functonal form of the model to acheve robust dentfcaton. 13

16 sample expects to pay for underwrtng a FP VHI plan (varable PREMIUM). Ths varable ncorporates exogenous shfters n the supply of nsurance arsng from geographc varaton n the market of healthcare nsurance. 7 The addtonal nstrumental varables we post are referenced n the lterature: the presence of dependent chldren n the household, whch mght affect the propensty to buy addtonal nsurance coverage (CHILDREN, a dummy ndcatng the presence of kds under 18, and #CHILDREN, ther number), and a set of dummes for the employment sector (AGRICULTURE, RETAIL TRADE, TRANSPORTS, PROFESSIONAL SERVICES, PUBLIC ADMINISTRATION, EDUCATION). Our argument s that, dfferent employment sectors offer dfferent opportuntes to enroll nto a VHI and also attract ndvduals wth dfferent degrees of rsk averson. 8 We checked the relevance of the whole set of nstruments n the health nsurance model, strongly rejectng the assumpton of ther coeffcents beng jontly equal to zero. Insert Table 4 here 5.3. UTILIZATION RESULTS: TREATMENT AND SELECTION EFFECTS Table 5 provdes the estmated coeffcents on the nsurance dummes, both under the null of exogenety and then by accountng for endogenety. Under exogenety, beng nsured does not affect the consumpton of publc vsts, rrespectve of the type of nsurance coverage. On the other hand, beng covered by FP VHI, wth respect to not beng doubly nsured, exerts a sgnfcant postve mpact on consumpton of prvate vsts. Such a postve mpact, attrbutable to swtchng from not beng doubly nsured to beng covered by FP VHI, s qute large,.e. about 42%. Once we allow for endogenety of nsurance status, we fnd that selecton effects n VHI, due to unobservables, are substantal n our 7 The premum predcton s obtaned by estmatng a Heckman model on a set of regressors that are common to the two data sources such as gender, age, macro-area of resdence, dmenson of the muncpalty of resdence. The latter two varables capture exogenous geographcal varaton n the supply sde of the local market faced by the ndvdual, and are assumed to determne the nsurance choce only through ther effect on the local market premum. Occupatonal sector dummes are the extra regressors needed n the selecton equaton of the Heckman model, followng arguments explaned n the followng man text. The nstrumental varable PREMIUM we use s the ndvdual uncondtonal expectaton evaluated wth the estmated Heckman model. 8 The occupatonal sector dummes are used to generate excluson restrctons, both n our nsurance choce model and n the selecton equaton of the Heckman model on whch premum predcton s based (see prevous note). We checked that the coeffcents on sector dummes n our man model are almost unchanged when we exclude the varable PREMIUM from the specfcaton. Ths lack of collnearty between PREMIUM and occupatonal varables s explaned wth the fact that premum predcton s the uncondtonal expectaton n the Heckman model, and these varables do not enter nto t through ther lnear combnaton. 14

17 case study and crucal for the nference on treatment effects and other parameters of nterest. The mpact of beng covered by FP VHI on prvate consumpton s now a large +92%. Ths larger mpact hnges upon substtuton for the publc vsts, whch are reduced by -135%. Concernng the mpact on the demand for publc vsts, accordng to our estmates, whle beng covered by NFP VHI has no effect under exogenety, t leads to a large reducton (-117%) n the consumpton of ths class of vsts, f endogenety s allowed for. Under endogenety, the nsurance effects are estmated, controllng for unobservable characterstcs smultaneously affectng the two vst counts and the choce of nsurance coverage. Accordng to our estmates, the unobservables that ncrease the probablty of beng doubly nsured, rase the consumpton of publc vsts whle decreasng that of prvate ones. Somehow, we have a mxed pattern of adverse and favorable selecton nto nsurance. A possble canddate for ths pattern s ndvdual rsk averson. Prvate specalst vsts, ndeed, are prced accordng to a more cumbersome and varable schedule. Thus rsk averse ndvduals may be more wllng than average to doubly nsure and, smultaneously, rely less on prvate vsts. 9 Insert Table 5 here 5.4. UTILIZATION RESULTS: DEMAND ELASTICITIES The regressors' coeffcents (see table A1) are, wth few exceptons, qute precsely estmated and consstent wth prevous emprcal evdence on the determnants of vsts counts (Pohlmeer and Ulrch (1995); Deb and Trved (1997, 2002); Fabbr and Monfardn (2003); Atella and Deb (2008)). Wthn our specfcaton, the estmated demand elastctes represent partal demand responses to a small perturbaton of the equlbrum n the local market for publc and prvate consultancy (see Fabbr and Monfardn (2009)). In partcular, we can estmate a full set of (own- and cross-) prce and watng tme elastctes. Our results (see Table 6) suggest that the demand for publc specalst vsts s moderately prce senstve. The own-prce elastcty we fnd, despte qute mprecsely estmated, s n the order of magntude of those estmated n the lterature (see the survey n Cutler (2002)). Namely, a 10% prce ncrease reduces the average number of vsts by 1.9%. It s worth notcng that a pattern of substtuton prevals between publc and prvate specalst consultatons. Cross prce elastctes are both postve. The mpact of prvate fees on publc 9 Schmtz (2011) provdes drect evdence on rsk averson beng responsble for favorable selecton nto nsurance usng data from GSOEP. 15

18 demand s very mprecsely estmated, whle the mpact of publc fees on prvate demand s qute large and sgnfcant. Admnstratve watng tme plays a less substantal role as a ratonng tool for publc vsts, whle t seems much more relevant for prvate vsts, where the own-watng tme elastcty s about -2.3%. Beng exempt, sufferng from chronc condtons or beng lmted n ADL results n the consumpton of more vsts: all these varables are proxes of ndvdual health status. Statng to be n good or n very good health reduces demand of both classes of vsts. It s worth notng that hghly educated ndvduals do not consume more prvate vsts, whle ntermedate educated ndvduals consume more prvate specalst vsts to the same extent of publc ones (the coeffcents of both the educatonal dummes have very smlar magntude n the prvate vst equaton). These results can be consstent wth the vew purported by the Grossman model, that more educated ndvduals demand more health but less servces, n that they are more effcent and better nformed as consumers. Beng employed presumably pcks up the effect of tme constrants due to workng: these ndvduals consume more prvate vsts, especally f employed n a hgh poston. The drect effect of household ncome s never sgnfcant. On the contrary, our proxy for wealth (.e. home ownershp) exerts a sgnfcant and large postve mpact on the demand for prvate vsts. These patterns also hold under exogenety of the nsurance status. Therefore, by lookng at the demand equatons only and notcng that nether ncome nor wealth negatvely affect the demand for publc vsts, we mght be nduced to consder the Besley and Coate (1991) conjecture (.e. the rcher opt out from the publc provson) to be volated n our case study. Insert Table INSURANCE CHOICE RESULTS Average margnal effects on nsurance choce, of most of the regressors (see Table 7), are those expected. We fnd that a 10% ncrease n the ndvdual local premum for a prvate VHI polcy s assocated wth a 3.2% ncrease n the probablty of beng covered, just by the statutory health nsurance. Concomtantly, the same ncrease s assocated wth a large reducton (-17.8%) n the probablty of beng covered by a FP VHI, and a less dramatc drop (-6.9%) n the probablty of beng covered by a NFP VHI. Comng to the effect of 16

19 dfferental watng tmes to access the local publc provsons of specalst case, our evdence s mxed and somehow conflctng wth results n the lterature (see Besley et al. (1999)). We fnd some effect on the demand for NFP VHI, but not on the demand for FP VHI. Apparently, the wllngness to obtan a double coverage on top of SHI revealed by the choce of FP VHI does not respond to relatve longer wats n accessng the local publc supply. Insert Table 7 here Hghs and lows n the magntudes of assocatons between ncome and wealth and type of coverage are consstent wth theory: hgher ncome and rcher ndvduals are more wllng to get larger nsurance coverage. Notce that ths s so, even after havng partalled out the effects of educaton. These latter are, agan, consstent wth the expected hgher propensty to get nsurance coverage among the more educated. Beng employed s assocated wth a sgnfcant ncrease n the probablty of beng covered by VHI. The assocaton s larger n the case of coverage granted by NFP VHI only (+87%), and by FP VHI (+27%). A more smlar assocaton pattern, across the two VHI status, apples to the effect of hgh poston at work (.e. approxmately +50%). On the other hand, beng an entrepreneur or a selfemployed professonal does not correlate wth a larger probablty of NFP coverage alone, whle, t s assocated wth a large ncrease n the probablty of beng covered by FP VHI (+101%). Our proxes for health have, mostly, no sgnfcant margnal effects. Notce that the ncluded characterstcs are not used by the NFP nsurer n settng contrbutons, nor n the defnton of coverage, so that they mght be consdered as potental sources of asymmetrc nformaton. Therefore, t can be tentatvely sad that, the pool of ndvduals covered by a NFP VHI plan do not exhbt any compostonal systematc dfference n observed health rsk factors unknown to the nsurer. Our estmates of average margnal effects on nsurance choce probabltes of beng 1 year older (see Table 8), show some an ncreasng mpact of age on enrolment nto NFP VHI. Ths evdence could suggest that exstng contrbuton to NFP VHI plans, whch usually ncreases wth age, does not dscourage underwrtng as ndvduals get older. Comng to enrolment nto FP VHI, we fnd that the probablty of coverage ncreases wth both sufferng from a chronc condton and beng n good or very good self-rated health. Notce that ths last characterstc s clearly unobservable to the nsurer and has been shown to be a good predctor of future health condtons (see Idler and 17

20 Benyamn (1997)). Snce t can be consdered as a proxy for prvate nformaton on ndvdual health, our fndng ponts towards a slghtly favorable selecton nto FP VHI. Insert Table 8 here 5.6. OPTING OUT OR TOPPING UP? Accordng to our utlzaton results, nether ncome nor wealth have a drect negatve effect on the demand for publc vsts. On the other hand, the nsurance choce model estmates show that hgh ncome and rcher ndvduals more frequently buy addtonal VHI coverage on top of SHI granted by the NHS. Provded that havng a FP VHI coverage ncreases the demand for prvate vsts and, concomtantly, reduces that for publc vsts, t can, therefore, be concluded that the Besley and Coate (1991) argument can be reestablshed and qualfed: the rcher opt out from the publc provson through a larger FP VHI underwrtng. Insert Table 9 here To clarfy ths pont, we sum up our evdence n Table 9, where a back-of-the-envelope calculaton dsentangles the drect and ndrect effects of our proxes for ncome and wealth on publc versus prvate consumpton. We focus on the latter (.e. house ownershp), snce results are more clear cut. Accordng to estmates n Table 6, becomng a house owner ncreases the demand for publc vsts by 13.6% and the demand for prvate vsts by 25%. However, ths drect effect s not the end of the story, snce the mpact on vsts also goes through the probablty of beng nsured and moral hazard effects, condtonal on beng nsured. Becomng a home owner ncreases the average baselne probablty of beng doubly nsured wth FP VHI by 26 pp, whle that wth NFP VHI by 19 pp. The effect for beng doubly nsured wth FP VHI s to consume 135% less publc vsts and 92% more prvate ones, whle that for beng doubly nsured wth NFP VHI s to consume 117% less publc vsts and 69% more prvate. Therefore, the ndrect effect on publc and prvate vsts consumpton, determned by a swtch to beng a house owner va FP VHI, amounts to -35% and + 24% respectvely, whle that va NFP VHI s -22% and +13%. Largely, despte the drect effect of ownng a house on publc vsts beng postve, the ndrect effects va NFP and FP VHI are both negatve, so that the overall mpact turn nto negatve (.e. -44%). On the contrary, drect and ndrect effects, of becomng house owners, on prvate vsts are both postve, wth the overall mpact beng a large 62%. The left part of Table 9 dsplays the same calculaton under exogenety. The drect effect of wealth on prvate vsts s 18