Guell (2015), in their book Issues in Economics Today, adverse selection occurs when buyers have better information than sellers, and this can distort the usual market process and it can lead to missing markets as firms do not find it profitable to sell a good.
Adverse selection induces three types of losses:
Efficiency losses from individuals’ being allocated to the wrong plans;
Risk sharing losses, because premium variability is increased;
And losses from insurers’ distorting their policies to improve their mix of insured’s (Cutler & Zeckhauser, 1998).
In context of health insurance, company selling life insurance will find that people at higher risk of death will be more willing to take life insurance. An insurance companies analysis that the unhealthy people are more likely to pay for insurance policies if the insurance premium will high and should be based on their personal need. Hence, the insurance company should be able to make an appropriated decision to set the premium price by evaluating the heath condition of the people to be in profit. If the insurance company charges an average price, but only consumers who have higher risk buy they will make a loss. There is difference in the selection of insurance plan by healthy and less healthy people. Adverse selection affects the health insurance company because people who are essentially in need of insurance are ready to pay greater premiums for policies than people who are healthy.
Here, United Nations Sustainable Development Goals has aimed to ensure good health and wellbeing of the people by 2030. Nepal has also aimed to fulfill its commitment of achieving to ensure good health and wellbeing of their citizens. In recent, they have ensured the health care services for all. The government of Nepal has started health insurance program in few districts. According to this program, a household is considered as a unit and has to pay premium of Rs 2,500 annually to get the services worth up to Rs 50,000. If a family is unable to pay the premium, the government will pay for it (Nepal, 2018). This has initiated an exciting role in health care system.Here, for health insurance that has recently introduced to Nepal, adverse selection can be minimized by adjusting voucher amounts for individual risk. A combination of prospective or retrospective risk adjustment, coupled with reinsurance for high-cost cases, seems promising as a way to provide appropriate incentives for enrollees and to reduce losses from adverse selection (Zeckhauser, 1998).
When an insurance provider offers a policy, it must structure its contracts to compensate for high-risk individuals which will create an extra disincentive for low-risk individuals to buy insurance they might need. This implies that low-risk individuals have a hard time finding fair prices for their insurance needs. Hence, the market experiences a deadweight loss in efficiency because suppliers and consumers are no longer coordinating optimally. To sum up, the government can correct spontaneous market dynamics in the health insurance market by directly subsidizing insurance or through regulation; the two forms of intervention provide different results.
References
Cutler, D. M., & Zeckhauser, R. J. (1998, January). Adverse selection in health insurance. In Forum for Health Economics & Policy (Vol. 1, No. 1). De Gruyter.
Guell, Robert C. (2015). Issues in Economics Today , 7th edition- 2015 ISBN: 978-007802181
Guell (2015), in their book Issues in Economics Today, adverse selection occurs when buyers have better information than sellers, and this can distort the usual market process and it can lead to missing markets as firms do not find it profitable to sell a good.
Adverse selection induces three types of losses:
Efficiency losses from individuals’ being allocated to the wrong plans;
Risk sharing losses, because premium variability is increased;
And losses from insurers’ distorting their policies to improve their mix of insured’s (Cutler & Zeckhauser, 1998).
In context of health insurance, company selling life insurance will find that people at higher risk of death will be more willing to take life insurance. An insurance companies analysis that the unhealthy people are more likely to pay for insurance policies if the insurance premium will high and should be based on their personal need. Hence, the insurance company should be able to make an appropriated decision to set the premium price by evaluating the heath condition of the people to be in profit. If the insurance company charges an average price, but only consumers who have higher risk buy they will make a loss. There is difference in the selection of insurance plan by healthy and less healthy people. Adverse selection affects the health insurance company because people who are essentially in need of insurance are ready to pay greater premiums for policies than people who are healthy.
Here, United Nations Sustainable Development Goals has aimed to ensure good health and wellbeing of the people by 2030. Nepal has also aimed to fulfill its commitment of achieving to ensure good health and wellbeing of their citizens. In recent, they have ensured the health care services for all. The government of Nepal has started health insurance program in few districts. According to this program, a household is considered as a unit and has to pay premium of Rs 2,500 annually to get the services worth up to Rs 50,000. If a family is unable to pay the premium, the government will pay for it (Nepal, 2018). This has initiated an exciting role in health care system.Here, for health insurance that has recently introduced to Nepal, adverse selection can be minimized by adjusting voucher amounts for individual risk. A combination of prospective or retrospective risk adjustment, coupled with reinsurance for high-cost cases, seems promising as a way to provide appropriate incentives for enrollees and to reduce losses from adverse selection (Zeckhauser, 1998).
When an insurance provider offers a policy, it must structure its contracts to compensate for high-risk individuals which will create an extra disincentive for low-risk individuals to buy insurance they might need. This implies that low-risk individuals have a hard time finding fair prices for their insurance needs. Hence, the market experiences a deadweight loss in efficiency because suppliers and consumers are no longer coordinating optimally. To sum up, the government can correct spontaneous market dynamics in the health insurance market by directly subsidizing insurance or through regulation; the two forms of intervention provide different results.
References
Cutler, D. M., & Zeckhauser, R. J. (1998, January). Adverse selection in health insurance. In Forum for Health Economics & Policy (Vol. 1, No. 1). De Gruyter.
Guell, Robert C. (2015). Issues in Economics Today , 7th edition- 2015 ISBN: 978-007802181
Nepal, S. (2018). Health insurance in Nepal. In thehimalayantimes. Retrieved from thehimalayantimes.com/opinion/heal...
Zeckhauser, R. (1998). Adverse Selection in Health Insurance. In Forum for Health Economics & Policy (Vol. 1, No. 1, pp. 1-33). De Gruyter.