High health care expenditures following a health shock can have long-term economic consequences. Health insurance has the potential to avert economic difficulties following health shocks, increase health care utilization and improve health. However, adverse selection in health insurance markets may stop voluntary health insurance markets from providing protection to most consumers without substantial regulation and subsidization. This paper examines adverse selection in the SKY health microinsurance program in rural Cambodia. As part of this study we use a randomized experimental design to separate adverse selection from moral hazard. We test three implications of theories of adverse selection: that households joining are more adversely selected based on characteristics observable at the baseline; that households that purchase insurance at a high price are more adversely selected on observables than those that purchase identical coverage at a lower price; and that households that purchase at the higher price will demonstrate more adverse selection in utilization than households purchasing coverage at a lower price even after holding constant baseline characteristics ("unobservable" selection).
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