What is adverse selection?
Some state health insurance regulations permit insurance companies to control adverse selection. For instance, any state that allows the insurance company to medically underwrite an insurance application allows them to control the adverse selection by restricting those that are in the greatest need of coverage from being able to enroll in the plan. States that require the insurance companies to insure whoever applies, known as guaranteed issue, limit the ability of the insurance company to control adverse selection. Minimum participation requirements on group health plans also help the insurance companies to control adverse selection. When a company applies for health insurance, the insurance company may require that a certain percentage of eligible employees must enroll in the group plan. As an example, the insurance company may tell the employer that they will provide coverage to the group, as long as 75% of the employees join the plan. In other words, they are telling the employer, “We will insure your group, but we don’t just want just the high-risk employees on the plan, we also want the healthy people that are less likely to use the coverage and file claims.” 1 CommentLeave a comment |
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What is adverse selection?
This is the likelihood that persons who have an immediate need for health insurance are the ones that are most likely to purchase a health plan. These persons present a poorer than average risk to the insurance company because they are more likely to use their policy and submit medical claims. These people are also more inclined to remain on the health plan, even when premium rates increase. Insurance companies are constantly battling adverse selection and a higher than average adverse selection rate will increase premiums for all plan members since the insurance company must charge rates that are sufficient enough to pay the claims from this higher adverse selection group.
I thought I would share some insights into why ‘guaranteed issue’ is not a good thing for the average consumer. I understand that at first look it can sound unfair for insurance companies to exclude high risk patients from getting coverage, but it’s really not as simple as that. It’s the issue of allowing low-risk individual to get affordable health insurance. If insurance companies are forced to take on everyone who applies, that increases the overall risk for the insurance pool by more than what can be adjusted trough higher premiums. So they have no choice but to pass it on to the rest of their customers. That is why it is so difficult to find affordable health insurance. Especially the young and students struggle to find a plan they can afford, because they have to pay inflated premiums to pay for the high risk individuals.
I have seen many attempts to solve this problem over the years, such as forcing everyone to sign insurance, which in my opinion is just as bad and a way of making low risk individuals pay for high risk individuals. A better solution would be to allow insurance companies to deny coverage for some of these high risk individuals unless they pay a significantly higher premium. But it is a complicated issue no matter what way you choose to look at it.
Comment by Julian — May 25, 2009 @ 6:32 am