Question

We'll discuss the innate problems of adverse selection and moral hazard in health insurance.

The problem of adverse selection is about asymmetric (unequal) information among opposite parties involved in a transaction. Note, this problem is not just about uncertainty; it is about the risks arising from asymmetric information. As risks increase from adverse selection and/or moral hazard, so do insurance premiums.

As an illustration of asymmetric information in health care insurance marketplace, patients and doctors know more about the health status of an individual, than potential insurance providers do. In addition, we anticipate the demand for health insurance to be greater for prospective individuals with higher health risks than for prospective individuals with lower health risks. Furthermore, individuals with higher health risks are drawn to more generous health insurance plans, while those with lower health risks settle for cheaper insurance plans. When risks in the insurance marketplace rise, so will insurance premiums, potentially causing a death spiral as healthy individuals leave the insurance pool when faced with rising rates.

Given this brief account of adverse selection in the health insurance market place, discuss the following:

1. Do laws requiring insurance companies provide health insurance coverage of preexisting conditions increase or decrease adverse selection?
2. Can health insurance exchanges reduce the health insurance risks to insurance providers by “pooling” diverse groups of individuals?
3. Will the presence of cheap, high deductible insurance plans increase or decrease adverse selection?
4. Will “universal health insurance” lower adverse selection?
5. Will universal health insurance raise moral hazard?

Answer 1

Ans: 1 Laws requiring insurance companies to provide health insurance coverage of preexisting conditions can increase the problem of Adverse selection because if the people with the historical medical conditions are included mandatorily by law then then it will increase the cost to insurers; which means that there is high probability of these people of falling ill; just beacuse they have medical illness like diabetes etc. then to cover the cost of people with higher health risk , the insurance comapnies will increase the insurance premiums; which in turn will drive out those individuals who in general have lower health risks and without preexisting conditions; they will not be willing to pay high insurance premiums; thus healthy individuals will leave the insurance market when faced with rising rates. It will leave the insurance market  with the high health risk individuals, which will increase the problem of adverse selection

Ans 2 Health insurance exchanges by “pooling” diverse groups of individuals can  reduce the health insurance risks to insurance providers. Exchanges by creating a pool of individuals reduce the adverse selection problem because individuals sign up for insurance regardless of health status due to insurer participation requirements; There are rules pertaining to exchanges and health insurance comapnies have to follow these basic provisions; In health insurance exchanges there are community health providers, health centres all are included in Exchange network. By pooling the individuals a single risk pool is created in which there are individuals of diverse health risks and the company can charge that pool accordingly, thus by creating a single risk pool , there are less chances that market insurance premiums will be raised and individuals with lower heakth risk will leave the market.

One example of risk pool is employer group health insurance because employees often sign up for the coverage of insurance due to requirements and employer's contributions

Ans 3  Presence of cheap, high deductible insurance plans result in the lower monthly premiums and it will decrease the adverse selection because under high - deductible insurance plans individuals have to pay more expenses out of their pocket in case of healthcare cost thus by placing caps on the coverage of the insurance costs, comapnies try to protect themselves from adverse selection and if the high health risk individuals know that they have to pay more out of pocket expenses then they will not enter into insurance coverages, or they might have an incentive to take care of their heath, and lower health risk individual will have to lower premiums and he will also be more careful towards his health.

Ans 4 Universal Heath insurance lowers adverse selection because by covering more individuals and by covering almost everyone in the insurance policy then the insurance company would be no longer need to cover other people's cost in payments and thus individual and small group insurance premiums will be reduced and the government pays for the health risk for the individuals. government also provides some compensation to the insurance companies to cover their cost of insuring high health risk individuals under Universal Health Program. By covering everyone who applies for coverage and thus compensation will be reduced and thus adverse selection is lowered.

Ans Universal health insurance raise moral hazard because it will increse the risk that the individuals will indulge in the activities that are harmful for their health like smoking, drinking etc, because if the individuals know that they have health insurance and someone is ready to pay for their health care cost, then they ahve no incentive to take care of their health or sometimes will forcefully try to neglect their health so that they can get the amount of insurance coverage, thus there are higher chances that the individuals due to Universal health insurance will enter into life threatening activities.