The effect of health insurance on hospitalization: Identification of adverse selection, moral hazard and the vulnerable population in the Indian healthcare market Reshmi Sengupta ⇑ , Debasis Rooj Department of Economics, FLAME University, Gat No. 1270, Lavale, Off. Pune Bangalore Highway, Pune 412115, Maharashtra, India article info Article history: Accepted 18 May 2019 Keywords: Adverse selection Copula regression Endogeneity Health insurance Hospitalization Moral hazard abstract The Indian healthcare sector is growing at a rapid pace; nevertheless, inequality in healthcare consump- tion and catastrophic healthcare expenditure is also increasing at an alarming rate. In addition to socioe- conomic differences, poor healthcare infrastructure, and inadequate risk-pooling mechanisms; asymmetric information in the healthcare market is also a potential contributor to this inequity and increasing costs. The consequences of information asymmetry are adverse selection (AS) and moral haz- ard (MH). AS occurs if people with health risks (high-risk individuals) are more prone to buying health insurance as compared to low-risk individuals. MH occurs when insured individuals are more likely to use healthcare than the uninsured individuals, inflating insurance premiums and medical care costs. Empirically, AS and MH lead to endogeneity due to unobserved heterogeneity. In practice, endogeneity is often addressed by using the instrumental variable estimation technique; however, this approach suf- fers from identification problems. Therefore, in this paper, we use an instrument-free semi-parametric copula regression technique to examine how health insurance status affects hospitalization using a sam- ple of individuals from a large nationally representative survey for India. Our results suggest the presence of AS and potential MH in the Indian healthcare market. We observe that chronically ill individuals are probable sources of AS, which leads to possible MH. A spline regression analysis suggests nonlinearity in health insurance choice and healthcare utilization across age, education, family size, and household consumption expenditure. We find chronically ill women in India exhibit less insurance coverage and lower hospital care usage. We also identify the vulnerable groups, such as older adults and rural resi- dents, who have low insurance participation and high healthcare consumption. Our results indicate toward the need for evidence-based health care policy to manage the healthcare system and support the disadvantaged population of India. Ó 2019 Elsevier Ltd. All rights reserved. 1. Introduction India’s healthcare sector is one of the fastest growing sectors of its economy and is expected to continue growing. However, inequity in healthcare consumption is a pressing concern among the policymakers. As reported by Selvaraj, Farooqui, and Karan (2018), households in India bear a significant expenditure burden because the current system of prepayment for healthcare expendi- tures and risk-pooling mechanisms are inadequate. Moreover, gov- ernment spending on healthcare and social health insurance contributions are insufficient. Nearly 78 percent of total healthcare expenditure is out-of-pocket (OOP), which is one of the highest in the world (Azam, 2018). This high OOP expense on health services pushes many households into impoverishment and leads to catas- trophic health expenditures (CHE); consequently, preventing many households in India from seeking healthcare (Bhatia & Cleland, 2001; Madhukumar, Sudeepa, & Gaikwad, 2012). Health insurance can be an effective way to avoid the burden of high OOP healthcare spending. However, according to the National Sample Survey report (NSS, 2015), only a small percentage of the total Indian population (14 percent rural and 18 percent urban) were covered by any form of health insurance scheme, with a majority covered under public health insurance (particularly, Rashtriya Swasthya Bima Yojna (RSBY) and similar schemes). India has proposed achieving Universal Health Coverage (UHC) for all by 2022. To accomplish this goal, India is planning to provide UHC with an objective of reducing household healthcare spending and https://doi.org/10.1016/j.worlddev.2019.05.012 0305-750X/Ó 2019 Elsevier Ltd. All rights reserved. ⇑ Corresponding author. E-mail addresses: reshmi.sengupta@flame.edu.in (R. Sengupta), debasis.rooj@ flame.edu.in (D. Rooj). World Development 122 (2019) 110–129 Contents lists available at ScienceDirect World Development journal homepage: www.elsevier.com/locate/worlddev