Biased selection in the Federal Employees Health Benefits Program.

The existence of biased selection in health insurance markets has long been assumed by economic theorists as well as seen between classes of health plans. In this paper, we use a model of the premium rate that takes into consideration the effects of moral hazard to make empirical estimates of the extent of selection in the Federal Employees Health Benefits Program. We find that biased selection has raised the premium of the Blue Cross Plan high-option coverage by 21% and lowered the premium of the low-option coverage by 29%, both relative to premiums that would have been charged in the absence of selection.