Tuesday, May 7, 2013

Anticipate adverse selection: what if only high cost individuals buy health insurance?

President Obama's health care plan has a problem:  If younger, healthier people opt not to purchase mandated health insurance, and instead pay for the penalty, then insurance "pool" will consist mainly of older, sicker, and higher cost people. 

Insurance companies are spooked by this possibility, so they are already raising premiums to protect themselves from potential losses. Yet this step can help create the very problem that they are trying to avoid. If premiums are high—or even just perceived to be high—young people will be more likely to avoid buying insurance, which could start the negative, downward spiral of exchanges full of the sick and elderly with not enough healthy people paying premiums.

1 comment:

  1. It is absolutely true that the elderly are more likely than the young to have more medical problems and thus a higher premium for health insurance. Where I disagree is in the fact that a significant amount of young people will opt out and take the penalty. Younger people are more informed than in the past due to technology and social media. They understand that health care costs are high but the price will be much higher without insurance. Its no different than owning a car in that you pay a certain premium for your insurance. When you finally due get into an accident and see the bill for repairs it make you wonder how you would pay for this if you didn't have insurance.

    Unfortunately the data tells us that health insurance companies are anticipating low young adult enrollment. Health insurance companies are a a disadvantage due to adverse selection. They cannot predict how many and what age group will actually sign up for health insurance. For this reason they preemptively set high costs in anticipation of sicker individuals signing up and not necessarily the healthy. It will take a considerable amount of time for costs to level off until data is collected and analysis can be made as to whom is actually signing up for health insurance on a consistent interval.

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