Claim Timing and Ex Post Adverse Selection:Evidence from Dental "Insurance"

Abstract

A large fraction of 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-ofpocket 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 analyzes dental treatments and insurance, with the goal of understanding the insurance market for dental care and also revealing lessons that apply to insurance markets more broadly. Using rich claim-level data from a large firm, I present several simple tests of the hypothesis that people strategically delay dental treatments and adversely select insurance coverage. These tests provide the key identification and motivation for a structural model which I develop to explicitly link the endogenous delay of treatment to the adverse selection it causes, allowing me to evaluate the relative importance of this source of adverse selection as compared to traditional adverse risk selection. My analysis shows that the strategic delay of treatment and the associated adverse selection can explain why so few people have dental coverage in the US and why typical dental \insurance'' contracts provide so little insurance. More generally, my results suggest that features such as open-enrollment periods and contracting on pre-existing conditions may overcome market unraveling in insurance contexts where the timing of risk is not contractible.