The German statutory health insurance market was exposed to competition in 1996. To limit direct risk selection the regulator required open enrollment. As the risk compensation scheme, introduced in 1994, is highly incomplete, substantial incentives for risk selection exist. Due to their low premiums, company-based sickness funds have been able to attract a lot of new members. We analyze, using data from the German Socio-Economic Panel, the determinants of switching behavior from 1995 to 2000. There is no evidence for selection by funds. The success of the company-based sickness funds originates in incomplete risk adjustment together with the negative correlation between health status and switching costs.
Copyright (c) 2005 John Wiley & Sons, Ltd.