Real options in health insurance decisions: the Portuguese ADSE system

Abstract

The choice between two different health insurance providers is, more often than not, taken from a static point of view, measuring costs and benefits at a specific point in time, not considering all the relevant changes that may occur in life and in health conditions. Inspired by the new regulations set in place by the exclusive Portuguese civil servant’s insurance scheme designated by ADSE, this study proposes a novel approach based on real options for an individual that needs to choose between a private health insurance and the apparently cheaper option provided by ADSE. Starting from the net present value approach, we subsequently show that, depending on some life changing events that may occur, it would be more beneficial for the individual to either abandon the health system or enter it at a later date. By incorporating the value of these options in the net present value calculation, decisions taken are not only more flexible, but also more realistic.