Adverse Selection and Consumer Inertia: Empirical Evidence from the Dutch Health Insurance Market

This paper examines to what extent consumer inertia can reduce adverse selection in health insurance markets. To this end, we investigate consumer choice of deductible in the Dutch health insurance market over the period 2013-2018, using panel data based on a large random sample of all insured individuals in the Netherlands. The Dutch health insurance market offers a unique setting for studying adverse selection, because during annual open enrollment periods all adults are free to choose an extra deductible up to 500 euro per year. By focusing on deductible choices of those who do not switch health plans, we are able to examine the adverse selection effect in absence of distortions caused by other health plan attributes. Our dynamic logit model reveals clear evidence of adverse selection, but we also find that it is counteracted by a high level of consumer inertia.