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Adverse selection with a multiple choice among health insurance plans: a simulation analysis
1RAND Corporation, Washington, DC.
Journal of Health Economics
|July 7, 1992
Summary
Adverse selection can eliminate high-benefit insurance plans when premiums are experience-rated. Varying premiums by demographics or using supplementary insurance markets significantly reduces this adverse selection effect.
Area of Science:
- Health economics
- Insurance markets
- Risk management
Background:
- Adverse selection occurs when individuals with higher risk are more likely to purchase insurance.
- Accurate risk forecasting by families influences insurance purchase decisions.
- Understanding adverse selection is crucial for insurance market stability.
Purpose of the Study:
- To quantify the impact of adverse selection on insurance markets using simulation.
- To investigate how different premium structures affect adverse selection.
- To analyze adverse selection in supplementary insurance markets.
Main Methods:
- Simulation modeling to assess adverse selection effects.
- Utilizing data on family risk perception and insurance purchasing behavior.
- Comparative analysis of single, experience-rated premiums versus demographic-rated premiums.
Main Results:
- Single, experience-rated premiums can lead to the elimination of high-option benefit plans due to adverse selection.
- Adverse selection is substantially mitigated when premiums are adjusted based on demographic factors.
- Supplementary insurance markets exhibit restricted adverse selection due to underpricing of benefits.
Conclusions:
- Insurance market design significantly influences the prevalence of adverse selection.
- Premium setting strategies, such as demographic rating, can counteract adverse selection.
- Supplementary insurance models may offer a more stable market alternative.
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