Sunday, April 04, 2010

Adverse selection

There is an excellent article by Kay Lazar in today's Boston Globe about a perverse result in the Massachusetts insurance market that has been partially responsible for the higher insurance rates in the individual and small business sectors. Here's the lead paragraph:

Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses.

Wikipedia offers a concise description of this adverse selection problem:

The term adverse selection was originally used in insurance. It describes a situation where an individual's demand for insurance (either the propensity to buy insurance, or the quantity purchased, or both) is positively correlated with the individual's risk of loss (e.g. higher risks buy more insurance), and the insurer is unable to allow for this correlation in the price of insurance.


Mark Graban said...

So it begs the question of what it would take to increase the fine for not having insurance. $93 a month doesn't seem like a huge deterrent. That wouldn't be politically popular, though, eh?

Barry Carol said...

Ideally, the fine should be roughly equal to the cost of the lowest priced plan available in the market.

The concept of two or even one open enrollment period per year is good as far as it goes. I also think that people should have to commit to buying health insurance policies for a full year at a time. They could cancel if they acquire insurance through a new employer or through a spouse’s employer or if they become unemployed and qualify for a hardship exemption. It’s unfortunate that liberal politicians are quick to vilify insurers for raising rates even when their profits are minimal or non-existent but slow to stop individuals from gaming the system even when (former) insurance executives like Charlie Baker brings the matter to regulators’ attention. Regulators should be able to strike a better balance than that.

Paolo said...

The easiest solution to this problem is to have health insurance premiums directly deducted from payroll (up to a certain percentage of pay). Anybody who already has insurance (e.g. from a spouse) can get a payroll exemption by showing proof of insurance.

This is preferable to waiting periods or open enrollments since the latter may encourage some people to try their luck and remain temporarily uninsured. And when they get sick, their trips to the ER are still paid by the rest of us.