# Estimating the adverse selection and moral hazard in Urban and Rural Resident Basic Medical Insurance of China: a semi-parametric estimation approach

## TL;DR

This study examines how health insurance in China leads to excessive medical resource use by analyzing adverse selection and moral hazard among urban and rural residents.

## Contribution

The paper introduces a semi-parametric estimation approach to separately quantify adverse selection and moral hazard in China’s URRBMI.

## Key findings

- Insured individuals had worse health than the uninsured, showing adverse selection that worsened after a premium increase.
- Moral hazard was significant, especially among older, wealthier, and more educated individuals, causing 13.8% of total medical spending in 2020.
- Payment reforms reduced over-consumption by 2022, cutting the proportion of excessive spending to 10.6%.

## Abstract

This study investigated the causes of excessive medical resources consumption, by disentangling and estimating the adverse selection and moral hazard within China’s Urban and Rural Resident Basic Medical Insurance (URRBMI), with the aim of proposing targeted solutions to this issue.

The analysis employed a utility optimization model of residents’ medical consumption. Parameters were estimated via kernel density estimation, moment estimation, and bootstrap methods, using data from the China Family Panel Studies (32,822 observations across 31 provinces for 2020 and 2022). Adverse selection was assessed by comparing the health distributions of the insured and uninsured derived from the model, while moral hazard was examined by constructing a counterfactual scenario based on Slutsky decomposition within the modeling framework.

The results indicate that the insured had poorer average health status than the uninsured in both 2020 and 2022, demonstrating adverse selection in URRBMI. This issue intensified by 2022 following a premium increase. Moral hazard was also identified, particularly among the older population, higher-income, less healthy, and more educated enrollees. Specifically, the moral hazard incidence rate was 46.63% in 2020, leading to per capita medical over-consumption of 204.57 yuan, accounting for 13.8% of total medical expenditures. Following the implementation of DRG/DIP payment reform, the over-consumption decreased in 2022 to 187.63 yuan, with the proportion falling to 10.6%.

To address the excessive medical resources consumption, policymakers should focus on two key measures: expanding insurance coverage while increasing government premium subsidies to mitigate adverse selection, and advancing payment system reforms to curb the moral hazard induced medical over-consumption.