Tuesday, October 11, 2005
Ezra Klein's blog has a great discussion by Neil concerning adverse selection in the private insurance market. He states,
So how do we stop an adverse selection death spiral? Insurers try to ask you some questions before you sign up, so they can price people appropriately, but this usually isn’t enough to overcome the differences in information. Because you actually lived through your life, you’ll still know more about your own health situation than a company that made you fill out a form. So you’ll use your extra knowledge against the insurer. This leads to smaller spirals, but they’re bad news nonetheless, and you have to be pretty risk-averse before you'll even buy this kind of insurance.
One thing we can do is push more healthy people into the system. This is why it’s cheaper for employers to provide health insurance than for the private market to do so. Insurance companies know that when they deal with an employer, they’ll be getting a reasonably good selection of healthy people, so they’ll give the employer a better price. Your employer probably doesn’t offer you the option of taking a cash payment instead of health coverage. If you could get that kind of deal, the per person cost of health insurance would go up a lot for your employer, because they'd be buying only for an adverse set of clients.
Pushing more people into the system is basically what we universal coverage fans want to do. If the government covers everyone, everyone can have the security of insurance without having to pay the insane prices at the top of the adverse selection death spiral. Sure, this means that healthy people might not be able to take on some risk for a good deal. And if a large percentage of the American population took wild gambling pleasure in the idea of going without health insurance to save money, maybe that’d give us an argument against universal coverage. But nobody actually thinks about health insurance that way. So even if some healthy people are stuck with a mildly bad deal, the aggregate population is better off due to everyone having security.
For those of you who liked this, and want to see a badass young wonk doing something cool, watch Matt Yglesias point out how adverse selection afflicts the annuity market and bedevils Social Security Privatization schemes.