Abstract
China’s Urban and Rural Residents’ Basic Medical Insurance (URRBMI) system recently was formed to integrate two prior-existing government health insurance programs for low income citizens: the New Cooperative Medical Scheme (for rural residents) and the Urban Residents’ Basic Medical Insurance system (for non-employee city dwellers). Like its two predecessors, the URRBMI is a voluntary, government microinsurance facility whose lack of underwriting procedures makes it vulnerable to adverse selection. To address this problem, we propose a practical contract mechanism that encourages each buyer to purchase a coverage amount that reveals his/her inherent risk level, for an actuarially fair price. Historical provincial-level data from the New Cooperative Medical Scheme are used to illustrate the proposed approach.
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