Household Bundling to Reduce Adverse Selection: Application to Social Health Insurance

This paper explores the use of bundling to reduce adverse selection in insurance markets and its application to social health insurance programs. When the choice to buy health insurance is made at the household level, bundling the insurance policies of household members eliminates the effect of adverse selection within a household. However, this can exacerbate adverse selection across households. The net effect of this trade-off depends on the characteristics of the household demand for medical care and risk preferences. I explore this issue using individual survey data on insurance enrollment and medical spending in Vietnam that contain detailed information about the structure of the household and develop a model of household insurance bundle choice and medical utilization. The estimation results suggest that much of the adverse selection is concentrated within the household. Counterfactual analysis reveals that under optimal pricing, household bundling yields significantly higher consumer surplus and insurance enrollment than individual purchase.