When doctors are unconstrained in setting fees, they charge higher fees to high income patients. For a standard GP consultation, the average fee gap is 25% of a minimum price. Competition closes this gap, but not local area income.

In a market where insurers are not allowed to risk rate, we find evidence of advantageous selection using observed health expenditure risk. Selection is driven by income and optimism about the future. This may explain insurers’ profitability, despite community rating.

We investigate the common assumption in applied research that reporting errors are negligible in variables where there is no clear incentive for misreporting. Using major medical operations, we find high misreporting rates, but the coefficients of their predictors remain unbiased.