Genetic testing and genetic discrimination: Public policy when insurance becomes "too expensive"

We examine public policy toward the use of genetic tests by insurers when a positive test makes actuarially fair insurance too expensive for some consumers. With state-dependent utility, consumers may decline actuarially fair insurance if the probability of becoming ill exceeds a threshold. In markets with adverse selection, a positive genetic test may cause all or some high risks to drop out of the market (complete and partial genetic discrimination, respectively). Full participation in the market by all consumers requires cross-subsidization. We show that the consent law and mandatory testing are equivalent. Under complete genetic discrimination, the duty to disclose is never Pareto dominated, but either the code of conduct or consent law can yield the same outcome. Under partial genetic discrimination, the duty to disclose is never Pareto dominated. However, partial genetic discrimination and cross-subsidization imply the information ban is noncomparable to the other policy alternatives.