Adverse selection: Does it preclude a competitive health insurance market? (original) (raw)
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Simple Humans, Complex Insurance, Subtle Subsidies
2008
The behavioral revolution in economics has demonstrated that human beings often have difficulty making wise choices. The most widely chronicled difficulties arise for decisions made under conditions of uncertainty, those whose consequences unfold over significant amounts of time, and decisions made in complex environments. Unfortunately, these are precisely the elements involved when individuals choose a health insurance policy, or decide whether to consume health care services. In this paper, we argue that traditional economic models of insurance are woefully insufficient for analyzing the tradeoffs inherent when giving consumers responsibility for making health care choices. We show that behavioral economics provides a stronger normative justification for many features of our existing health care policy than do the models of traditional economics. We then demonstrate that policy analyses of the wide range of subsidies that permeate the health care system change substantially when viewed from the behavioral perspective. In closing, we discuss how recent policy trends can be fruitfully assessed using a behavioral lens. The behavioral revolution in economics tells us that human beings often have difficulty making wise choices. The most widely chronicled difficulties in decisionmaking occur in conjunction with decisions made under conditions of uncertainty, decisions that involve significant elements of time, and decisions in complex environments. Unfortunately, these are precisely the factors involved when individuals choose a health insurance policy or choose whether and when to consume health care. Historically, U.S. consumers have been shielded from many choices about their health care. For most workers under the age of sixty-five, employers have been responsible for designing health insurance plans and have provided employees with a single plan or a simple menu of options. For the elderly and the poor, the government provided a single plan. Traditional plans often provided first-dollar coverage without co-pays, so a consumer's choice about whether to consume health care involved comparing only the inconvenience and discomfort of obtaining care with the potential benefits. Recent developments have put more choices and more quandaries before health care consumers.
Moody for their contribution to our understanding of the private health insurance market
2011
We test for asymmetric information in the UK private health insurance (PHI) market. In contrast to earlier research that considers either a purely private system or one where private insurance is complementary to public insurance, PHI is substitutive of the public system in the UK. Using a theoretical model of competition among insurers incorporating this characteristic, we link the type of selection (adverse or propitious) with the existence of risk-related information asymmetries. Using the British Household Panel Survey, we …nd evidence that adverse selection is present in the PHI market, which leads us to conclude that such information asymmetries exist.
Adverse selection and moral hazard in health insurance
In this paper, we want to characterize the optimal health insurance contract with adverse selection and moral hazard. We assume that policyholders di¤er by the permanent health status loss and choose an unobservable preventive e¤ort in order to reduce the probability of illness which is ex-ante identical. The di¤erence in illness'after-e¤ect modi…es policyholders' preventive actions. By the way, they di¤er in probabilities of illness leading to a situation close to Rothschild and Stiglitz 'model. In this case, we show that the optimal contract exhibits a deductible for the high health risk type since a higher after e¤ect implies a higher preventive e¤ort and then a lower probability of illness rather than for the low health risk type.
Journal of Health Economics, 1995
If premiums for health insurance are not risk related, there exists a consumer information surplus that may result in adverse selection. Our results indicate that insurers can greatly reduce this surplus by risk-adjusting the premium. We conclude that there need not be any substantial unavoidable consumer information surplus if consumers can choose whether to take a deductible for a one-or two-year health insurance contract with otherwise identical benefits. Therefore, adverse selection need not be a problem in a competitive insurance market with risk-adjusted premiums or vouchers and with such a consumer choice of health plan.
Guaranteed renewability uniquely prevents adverse selection in individual health insurance
Journal of Risk and Uncertainty, 2011
New models of multi-period insurance show that health insurance buyers can be protected against changes in premiums from health shocks associated with chronic conditions by the addition of "guaranteed renewability" provisions. These models assume that a buyer's risk level in every time period is observed by all insurers. They also require a premium sequence that is "front-loaded," which may be costly to buyers if capital markets are imperfect. We relax the common knowledge feature of the model by assuming that a person's risk in any time period is known only by that individual and the current insurer. One might suspect that a premium sequence with higher later period premiums would be incentive compatible because low risks will have less desirable offerings from alternative insurers. However, we show that generally, only the original premium schedule is incentive compatible, and attempts to alter front-loading will not be an equilibrium.
Individual insurance: health insurers try to tap potential market growth
Research brief, 2009
Individual insurance is the only source of health coverage for people without access to employer-sponsored insurance or public insurance. Individual insurance traditionally has been sought by older, sicker individuals who perceive the need for insurance more than younger, healthier people. The attraction of a sicker population to the individual market creates adverse selection, leading insurers to employ medical underwriting--which most states allow--to either avoid those with the greatest health needs or set premiums more reflective of their expected medical use. Recently, however, several factors have prompted insurers to recognize the growth potential of the individual market: a declining proportion of people with employer-sponsored insurance, a sizeable population of younger, healthier people forgoing insurance, and the likelihood that many people receiving subsidies to buy insurance under proposed health insurance reforms would buy individual coverage. Insurers are pursuing sev...
The Geneva Papers on Risk and Insurance - Issues and Practice
Health risk can be defined as the likelihood of a negative health consequence occurring due to a specific event, disease or condition. Its consequences can be strongly detrimental to individuals and society and managing health risks is a central concern for individuals and governments. This special issue of The Geneva Papers on Risk and Insurance on health aims at better understanding the role of insurance mechanisms in financing and managing health risks. It concentrates on four topics: the structure and performance of health insurance markets, the drivers of long-term care (LTC) insurance purchase, the phenomena of moral hazard in health insurance, and the effect of health insurance on the health of individuals. It offers nine contributions from various perspectives to better understand these issues and, in particular, the function and development of health insurance markets. These contributions tackle practical aspects and policy implications and are illustrated in the light of various health systems with application to countries such as Australia, Chile, China, South Korea, Switzerland and the U.S. Health insurance markets are organised in various ways and insurance carriers can take different forms, principally as stock insurers, mutual insurers or health maintenance organisations (HMOs). Health insurers also deal with various types of populations as they can specialise in serving individuals, groups, low-income people, older people, civil servants, etc. Naturally, the structure of their organisation and the type of population they serve strongly influence the governance and activities of health insurers. The first two papers address supply-side issues of health insurance markets by investigating the behaviour and performance of health insurers, either in relation to HMOs or in serving poor individuals.
Premium subsidies for health insurance: excessive coverage vs. adverse selection
Journal of Health Economics, 1999
The tax subsidy for employment-related health insurance can lead to excessive coverage and excessive spending on medical care. Yet, the potential also exists for adverse selection to result in the opposite problem-insufficient coverage and underconsumption of medical Ž. care. This paper uses the model of Rothschild and Stiglitz R-S to show that a simple linear premium subsidy can correct market failure due to adverse selection. The optimal linear subsidy balances welfare losses from excessive coverage against welfare gains from reduced adverse selection. Indeed, a capped premium subsidy may mitigate adverse selection without creating incentives for excessive coverage. Published by Elsevier Science B.V.