How does adverse selection affect the market for health insurance? What are some ways we have...

How does adverse selection affect the market for health insurance? What are some ways we have tried (or might try in the future ) to address this problem ?

Expert Solution

Health insurance is one of the emerging markets in today's world. Its demand is increasing day by day. With increasing market, options are also increasing, making it feasible for people to choose their health insurance from a bigger basket, basis their needs. However, their are tough challenges and of competition and profit in this area.

According to an article of World Bank, adverse selection, as mentioned in the question, can be defined as strategic behaviour by the more informed partner in a contract against interest of the less informed partner, like in cartels. As a consequence, healthy people will choose managed care and less healthy people will choose more generous plans.

If markets are not managed properly, people will only get to choose from a few big deals, which may or may not be useful in their situation. Only the big players will be able to monopolise the market. However ,small and more specific health insurance companies will be overshadowed. As a result people will get an insurance of no use or very less use for them. Ultimately, out of dissatisfied services, after a certain time frame, people will opt out of health insurance schemes, and the market will slowly dissolve; first for small companies and then the big firms also.

In such scenario, proper government regularization and market analysis, can address this problem. Government may jump into the market with their health insurance programmes, which will be low cost, secured, good quality, and according to people's need. They can launch subsidized health insurance or similar programmes. Governement can issue administered insurance prices for specific health issues, which is harming the spociety on a large scale. Health insurance companies should be properly monitored. Proper advertisement of all health insurance policies to all the citizens should be an initiative in government's part.

This way the markets will be regularized, proper and the adverse affects canbe reduced and controlled.

Rahul Sunny answered 2 years ago

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