Adverse Selection

Don McCanne 16, McCanne is MD from the University of California at San Francisco, Senior Fellow and President at Physicians for a National Health Program, 1-14-16, “Disentangling moral hazard and adverse selection,” http://www.pnhp.org/news/2016/january/disentangling-moral-hazard-and-adverse-selection

In health insurance, moral hazard occurs when individuals obtain more health care than they would have if it were not paid for by the insurer. Adverse selection occurs when individuals with greater health care needs select plans that provide greater coverage. Both have an impact on health care spending. This paper estimates the relative impact of each of these in spending under private health insurance. Each is responsible for roughly half of the differences of expenditures between the most and least generous health plans. So enrollees in the more generous plans pay higher premiums because of both moral hazard and adverse selection. Today’s standard in insurance coverage is shifting towards lower actuarial value plans - plans that pay a lower percentage of the total health care costs. What does this study tell us about premiums for these less generous health plans? As more people enroll in them, which they are, the premiums increase to cover the additional expenditures for those who otherwise would have enrolled in the more comprehensive plans. The lower actuarial value plans are subject to favorable selection (the healthy buying less expensive plans in anticipation of not needing care), but that diminishes as higher cost patients move from the more comprehensive plans into these cheaper plans.