^aStephen Ross School of Business, University of Michigan and NBER, 701 Tappan St., Ann Arbor, MI 48109, U.S.A

^*This research was done while I was a Packer Policy Fellow at the Centre for Health Economics Research and Evaluation at the University of Technology, Sydney. I thank the Australian Department of Health and Ageing for funding this project. I also thank Jim Butler, Paul Collins, Luke Connelly, Andrew Gale, Jane Hall, Charles Maskell-Knight, Elizabeth Savage, Rhema Vaithianathan and seminar participants at UTS, the University of Auckland and the University of Melbourne for helpful comments and suggestions.

Abstract

The regulation of health insurance is an important and often controversial issue. Rules intended to improve access to insurance for high-risk consumers have the potential to reduce overall coverage by inducing adverse selection. This paper examines the issue of adverse selection in the context of the market for private health insurance in Australia, before and after the implementation of a major policy reform in 2000. The policy, known as Lifetime Health Cover (LHC), created a financial incentive for consumers to enter the insurance market at earlier ages. I examine the extent of adverse selection prior to this reform and evaluate its effect on premiums. The results confirm that implementation of LHC induced a greater number of younger consumers into the market, resulting in lower average premiums.