Study on Private Health Insurance
Long Terms Mitigate Problems
- von Birte Vierjahn
- 17.06.2025
The long terms of private health insurance contracts in Germany come close to what economic theory describes as ‘optimal’. An international study involving the University of Duisburg-Essen shows that many problems in the insurance market can be mitigated by long-term contracts – without any complicated contract design. The study is published in the Journal of Political Economy, one of the five leading economics journals.
One of the four authors is Prof Dr Martin Karlsson from the University of Duisburg-Essen (UDE). Together with colleagues from Cornell University, the University of Pennsylvania (both USA) and the Leibniz Centre for European Economic Research, he analysed how well the long-term contracts in private health insurance (PHI) work – compared to what economic theory describes as ‘optimal’.
A contract is optimal if it adapts flexibly to the current life situation – with higher premiums during high-income phases and lower premiums during low-income phases. In practice, this is hardly feasible. Nevertheless, the group of health economists shows that German private health insurance policies come surprisingly close to this ideal – especially if your income remains relatively stable over the course of your life.
Germany presents a rare opportunity for empirical analysis in this area: a dual health insurance system with the world's largest market for individual long-term contracts. "The German system is more interesting than those of many other countries, but it has barely been examined so far," says Karlsson. The study therefore used the German private health insurance contract system as a ‘natural laboratory’ to empirically test central assumptions of insurance economics.
The welfare gains are particularly striking: in numerous scenarios, they exceed 96 per cent of the theoretical maximum. This figure captures the economic value of long-term contracts: How much do I value having a secure, predictable, lifelong contract compared to taking out new insurance every year with the risk of paying more in the event of worsening health?
This is the strength of long-term contracts: They smooth risks over a lifetime. An accident or serious illness does not lead to higher premiums. What may seem disadvantageous in the short run – such as high premiums at younger ages – provides stability in the long term.
‘What we see here is a relatively simple arrangement with contracts of low complexity that comes remarkably close to the theoretical optimum,’ explains Karlsson. For him, the international implications are particularly important: "This could be an interesting model, especially for developing and emerging countries that are faced with the challenge of creating nationwide coverage. Our results show: Whether a viable market emerges depends above all on contract regulation. It is an argument in favour of long-term contracts – not necessarily of the German private health insurance system per se."
Original Publication: https://doi.org/10.1086/734781
Further Information:
Prof. Dr. Martin Karlsson, Health Economics, +49 201/18-3 3716, martin.karlsson@uni-due.de
Editor: Birte Vierjahn, +49 203/37 9-2427, birte.vierjahn@uni-due.de