The effect of financial risk on the demand for supplementary health insurance

Abstract

As access to medical services provided by public healthcare system in Poland is limited, private supplementary health insurance becomes an increasingly interesting option for pa-tients. Private insurance market has grown significantly in recent years. Therefore, it is interesting to determine factors contributing to the demand for supplementary health insurance by adopting a mathematical model of both compulsory public health insurance and additional, voluntary private health insurance. Such a model was introduced in Dudzinski’s work (2015). The model takes into consideration such factors like compulsory insurance premium, health status of a patient and effectiveness of the public health care system. In this paper we extend the model to the case of additional background financial risk. We show that introducing the additional source of risk exerts certain impact on the demand for the supplementary insurance, however its overall effect depends on the pa-tient’s prudence related to a sign of third derivative of the utility function. The paper pro-poses conditions under which the demand for supplementary insurance increases or de-creases, depending on the relation between patient’s prudence with respect to wealth and cross-prudence in health. The results are different from Dudzinski’s article which considered a two-period model.