Question

5. Healthcare markets. Describe briefly the adverse selection problem as it applies to health care markets.

Answer 1

5

                                    A healthcare market refers to an aggregation and integration of all the sectors in the economy that provides goods and services which is intended to treat patients with preventive, curative, palliative and rehabilitative care. Adverse selection process is a result of distribution of asymmetric information or information failure wherein one of the part in transaction would have the knowledge of some aspects of the sales which the other party don’t have. In a normal business, the sellers usually have more knowledge about something that the buyers don’t have. It often leads to tendencies like undertaking more business with less profitable or riskier market segments. In the healthcare sector, the major effects of these adverse selection problems are seen in the health insurance sectors. The following are expected to be the possible effects of adverse selection in the healthcare markets.

· The increased selection of health insurances by sicker people over healthier people occurs due to failure of the insurance firm to have the knowledge of the health situation of the policy holders. This could lead to more costs for the insurance firms and could result in inefficient insurance distributions

· From the medical goods perspective, the knowledge of an upcoming disease could help them produce more amount the same good at higher costs and hence could result in higher medical care costs for the people.

· It can lead to disruptions in much of the healthcare delivery mechanisms which could be dangerous for a healthcare consumer.

· When the insurance sector has more knowledge about something it could lead to more premiums which could result in reduction in the number of insurance holders.

                                                  All the above are the various harmful effects of adverse selection in the healthcare sector of an economy and hence these tendencies should be eliminated so as to prevent dangerous effects in such a sensitive sector.