Basic versus supplementary health insurance: Moral hazard and adverse selection

•consider a health insurance system with public universal basic insurance and private supplementary insurance•we show that basic insurance should cover the treatments with the biggest adverse selection problems•for basic insurance inefficiency of private market is more important than cost effectiveness

This paper introduces a tractable model of health insurance with both moral hazard and adverse selection. We show that government sponsored universal basic insurance should cover treatments with the biggest adverse selection problems. Treatments not covered by basic insurance can be covered on the private supplementary insurance market. Surprisingly, the cost effectiveness of a treatment does not affect its priority to be covered by basic insurance.