ADVERSE
SELECTION
(January
2014) Proponents of nationalized medical insurance long ago conceded the problem
of adverse selection, i.e., buyers
and sellers with asymmetric information1
create an unsustainable risk pool with few healthy and many unhealthy enrollees. The federal Affordable Care Act tries to
address adverse selection via the individual mandate, limited open enrollment,
moderate fines and enrollee subsidies. Proponents
are preoccupied with enrollment figures2 because a minimum of 2.7 million healthy young Americans must enroll to create a sustainable
risk pool under the 2010 act.
Market-based
critics argue the act will only work if healthy Americans enroll. Too many unhealthy enrollees will result in higher
insurance premiums, fewer enrollees, and, ultimately, a systemic death spiral. Proponents counter the subsidy system built
into the act would cushion the effect of higher premiums by using federal
subsidies to limit percentage increases.
Their argument: if adverse selection occurs 2014 enrollees would pay the
same in 2015 if their incomes remain constant, leading healthy enrollees to
stay, not exit the plan.
But
proponents ignore another economic problem: the long-term fiscal cost to
Arkansas' state budget caused by adverse selection. The argument advanced by
nationalized medical insurance proponents relies on federal subsidies to
address adverse selection.3 These subsidies are unsustainable if the bond
market rejects their premise.4 Proponents also seem unaware that internal
adverse selection will effect external Arkansas markets
because the act mandates insurers rely on a single risk pool. The concept of unintended consequence
may follow adverse selection in the medical insurance lexicon.
--Greg
Kaza
1 One party to an
economic transaction has more information. George Akerlof's
1970 paper, "The Market for Lemons" (Quarterly Journal of Economics) examines problems created by
asymmetric information. Akerlof is the 2001 Nobel
Economics Laureate and husband of newly-installed Fed Chair Janet Yellen. Also see David
M. Cutler and Richard J. Zeckhauser, "Adverse
Selection in Health Insurance" in Frontiers in Health Policy Research Vol. 1 (editor: Alan M. Garber), MIT (1998); Gregory Lewis,
"Asymmetric information, Adverse Selection and Online Disclosure: The Case
of eBay Motors," American Economic
Review, Vol. 101, 4 (June 2011); and Martin B. Hackmann, Jonathan T. Kolstad and Amanda E. Kowalski, "Health Reform, Health
Insurance, and Selection: Estimating Selection into Health Insurance Using the
Massachusetts Health Reform," AER,
Vol. 102, 3 (May 2012).
2 The preoccupation
with enrollment figures is also evident in coverage of Arkansas Medicaid
expansion.
3 Proponents of Arkansas Medicaid expansion also rely on federal subsidies to maintain their scheme in the three-year short-run by ignoring long-term costs.
4 The yield on the bellweather
10-year Treasury note increased 119 basis points in 2013.