Thursday, November 18, 2004

One of the problems with market solutions to health insurance is that sick people want it, and they cost the insurance companies a lot of money. Stanford economist Alain Enthoven, a noted expert on healthcare, has a solution:

One problem that providers face is what economists call "adverse selection." This means that workers who need more-expensive health care because of existing conditions will want to choose more comprehensive plans. This leads to higher costs for such plans, making the premiums even more expensive.

Mr. Enthoven advocates "risk adjustment" to control for adverse selection. This is a type of statistical procedure that estimates the likely cost of subscribers based on age, location, sex and so on, allowing insurers to predict the cost of those who sign up. Premiums can then be adjusted to reflect actual costs related to different health risks associated with different populations.

And if a diabetic recovering cancer patient finds herself in a cohort with premiums so high that she can't afford insurance at all, it's just a testimonial to the efficiency of the marketplace. To those of us who thought that the purpose of health insurance was to pay the medical bills of the sick this is indeed a truly remarkable innovation...

More: Jim Henley and Atrios are actually thinking about this, rather than just throwing mud pies...


Anonymous Anonymous said...

Of course! That's it! "Risk adjustment"! Gosh, the actuaries of the world are gonna look pretty silly, with all that worrying about adverse selection for the last 250 years, when all they needed was "a statistical model".

It's this kind of arrogant, know-nothing, blase statements about incredibly complicated subjects that get economists a bad name. As it happens, it is much, much more difficult than you would think to get any solution to an adverse selection problem, and it has been known for at least a century that pricing solutions do not in general work - "you can't price away a bad risk".

12:28 PM  
Blogger Michael Corson said...

In my market, all groups are demographically underwritten. What this means is that much like your Homeowner's/Auto insurance, all are thrown into a big pool. The only instance where "adverse selection" even enters into the equation is with the area Blue Cross plans and trust me, they underwrite this into their rates. Quite frankly, they as well are doing quite nicely as their reserves continue to build into the high eight and nine figures.

11:57 AM  

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