Adverse selection and regulation in health insurance markets.

In this paper we look at various ways to regulate the health insurance market and ask whether they provide an answer to the problem of adverse selection. To avoid inefficiency, government policy must either effectuate some cross-subsidization of insurance policies within the state sector or grant private insurance firms an exclusive right to serve certain groups of the population. Recent reforms in the Netherlands and Germany and President Clinton's proposals for the US could be adapted to fulfil these requirements. Efficiency cannot be achieved, on the other hand, if the regulator tries to "prescribe" cross-subsidization within the private sector.