Question

How do insurers attempt to control for adverse selection and moral hazard problems in health insurance? Give four examples.

Answer 1

Adverse selection of health insurance happens when sick people, or others who provide the insurer with a higher risk, buy health insurance when healthy individuals do not buy it. Adverse selection can also occur as sicker people purchase more health insurance or more robust coverage policies and healthy individuals purchase less cover.

Health insurance providers will use medical underwriting to try to prevent adverse selection on an unregulated health insurance market. The underwriter must analyze the applicant's medical history, background, previous statements and lifestyle decisions during the underwriting process. It helps to assess the risk facing the insurer in insuring the individual applying for a health insurance policy.

The insurer may then decide not to sell health insurance to someone who presents too great a risk or charge a higher premium for a riskier person than someone who is likely to have less claims. Therefore, a health insurance provider may mitigate the liability by imposing an annual or lifetime cap on the amount of coverage it offers to anyone, by removing pre-existing conditions from coverage, or by excluding certain forms of costly health care goods or services from cover.

Most health insurance providers in the United States are no longer permitted to use any of these strategies, though they had been commonly used in the consumer (non-group) market prior to 2014. The Rule on affordable care: Prohibits private insurers from refusing to sell health benefits to preexisting persons. Prohibits insurers from paying more patients with pre-existing conditions than healthier people are charged with. Prohibits insurance insurers from implementing annual or lifetime benefits limits.

Although rates on the individual and small group markets can not differ depending on health status or gender, the ACA allows insurance insurers to charge up to three times more for older people than they charge for young. Older people appear to have more medical costs than younger people, and thus pose the insurer with a higher risk. There are a few states that do not require insurers to charge three times as much for older people as younger ones.