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Can Private Insurers Fail to Cream-Skim the Public Option? Evidence from the Individual Mandate in Germany

Conventional wisdom suggests that if private health insurance plans compete alongside a public option, they may endanger the latter's financial stability by cream-skimming good risks. Documenting cream-skimming in dual insurance systems empirically is challenging, since selection into private insurance is non-random and being privately insured may change individual's healthcare consumption. In this paper, I use a regression discontinuity design based on exogenous variation in the propensity of choosing private health insurance to address this challenge. The empirical setting is the health insurance system in Germany, where there exists an unsubsidized non-group for-profit private health insurance market in parallel to a statutory alternative. Federal regulation mandates individuals with income below an annually set threshold to enroll into the statutory system, which is a policy that I exploit for my empirical strategy. Surprisingly, the data does not corroborate the conventional wisdom about selection on the extensive margin, as I do not find compelling support for cream-skimming by private insurers. Using a discrete choice model of demand for private insurance, I explore heterogeneous tastes for convenience in healthcare consumption and long-term contract design of private insurers as potential explanations for this result.