Biased selection within the social health insurance market in Colombia

Reducing the impact of insurance market failures with regulations such as community-rated premiums, standardized benefit packages and open enrolment, yield limited effect because they create room for selection bias. The Colombian social health insurance system started a market approach in 1993 expecting to improve performance of preexisting monopolistic insurance funds by exposing them to competition by new entrants. This paper tests the hypothesis that market failures would lead to biased selection favoring new entrants. Two household surveys are analyzed using Self-Reported Health Status and the presence of chronic conditions as prospective indicators of individual risk. Biased selection is found to take place, leading to adverse selection among incumbents, and favorable selection among new entrants. This pattern is absent in 1997 but is evident in 2003. Given that the two incumbents analyzed are public organizations, the fiscal implications of the findings in terms of government bailouts, are analyzed.