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Discussion on: Adverse selection in health insurance and it’s value proposition if implemented in Nepal

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sanjaya

Adverse selection happens when a purchaser has exceeding information than sellers which can distort the usual market process where firms do not find it beneficial to sell a good. Similarly, in the insurance industry, the term adverse selection is used to describe the situation where one party is at a disadvantage due to the lack of symmetric information prior to a deal between two parties. The prevalence of that form of asymmetric information happens due to the insurance company’s inability to properly discriminate clients with distinct probabilities of becoming ill (Resende & Zeidan, 2010).

On the basis of identified risk variables such as the policyholder’s general health condition, age, occupation, and lifestyle an insurance company provides insurance coverage. Similarly, insurance company charges higher premiums to the higher-risk individual whereas lower premiums to lower-risk individuals. For instance, a person who works as a pilot is charged relatively higher premiums than a person who works as a car driver for health insurance coverage.

Accordingly, adverse selection for insurance company happens when applicants provide false information and manage to obtain insurance coverage at lower premiums than the insurer would charge. For example, a smoker is identified as a risk factor for health insurance where he has to pay higher premiums than a nonsmoker. However, when the smoker applicant provides false information and manages to obtain health insurance coverage at the lower premium then in this situation adverse selection occurs.

In this way, the insurance company suffers from an adverse effect by offering insurance coverage at a cost which doesn’t correctly consider its actual risk exposure.

In another side, health insurance is a kind coverage policy that covers the cost of an insured individual’s medical treatment and more such as pre-hospitalization expenses and post-hospitalization charges. The health condition of Nepalese people is comparatively poor than other Asian nations due to periodic epidemics of natural hazards, infectious disease, and illiteracy. Nepalese constitution guaranteed equal access to health services as a fundamental right. Subsequently, the government started insurance program in few districts for ensuring health care services where insured people can have access to curative, preventive and rehabilitative health services (Mishra, Khanal, Karki, Kallestrup, & Enemark, 2015). In this scenario, I think the adverse selection rarely exist in the insurance policy of Nepal. However, if the effectiveness of the insurance company’s risk evaluation system is properly managed then it increases the value of health insurance in Nepal.

References

Mishra, S. R., Khanal, P., Karki, D. K., Kallestrup, P., & Enemark, U. (2015). National health insurance policy in Nepal: challenges for implementation. Global Health Action, 8 .

Resende, M., & Zeidan, R. (2010, Aug). Adverse selection in the health insurance market: some empirical evidence. The European Journal of Health Economics : HEPAC, 11 (4).