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Do you know how adverse selection is affecting the healthcare market?

In the insurance industry, adverse selection is a term used to describe those situations in which an insurance company provides coverage to an insurance applicant whose risk is substantially higher than the risk known by the insurance company. This creates the potential for sizable financial losses on the insured party, and the impact on adverse selection is all around us. Discover how adverse selection is impacting the healthcare market and could be making an impact on your insurance agency:

An Overview of Adverse Selection and Insurance

Adverse selection is a complex issue, in part because the people who often need insurance the most are those who pay the highest insurance premiums. There are higher health risks for someone who is obese, doesn’t exercise, and smokes. If an insurance company bases the rate on all of their employees as a whole, then the premiums for even high-risk employees would be lower than they would be on their own. Because the average individual may be obese but not smoke, his or her insurance premium is usually less. That is, if that person even has health insurance at all. Because often times, those who are healthy feel that they do not need insurance and are not insured. The unhealthy person is a much higher risk to insure, providing an adverse selection scenario for the insurance provider.

Adverse Selection and Buyers

Many times in insurance, a seller might provide coverage to a buyer, but only in a situation where it would be favorable to them financially. For example, if a business is providing health insurance to their staff, they might only provide them with the options that would cost the business the least possible amount of money. Businesses often want to reduce the expense of employer-paid health care whenever they can. This could result in businesses not informing the consumer of all the options available to them, so the individual makes a decision that will benefit the employer or insurance company.

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Practical Solutions to Adverse Selection

While an employer, in many cases, cannot prevent the fact that adverse selection will impact health care costs, they can limit the impact that the higher expenses will have on the rest of the company. For this reason, it is common for employers to offer various health care insurance options, including a reduction in benefit costs if the employee successfully meets certain definable health criteria that are proven to reduce health care risks. This way, the company effectively reduces premiums for those who are costing the company less while ensuring that employees who are costing the company more pay their fair share. Those at higher risk for diabetes, high cholesterol, or high blood pressure get the coverage that they need without having their healthier colleagues feel that their good health is being punished.

Summary of Adverse Selection and Health Care Insurance

Most of us receive health insurance through plans that are administered and subsidized by our employers. The cost to employees usually depends on the health plan they choose. The higher the premium to the employer, the higher the charge will be to employees. This results in people paying for an insurance policy that often subsidizes the cost for those people who have more health ailments. The current arrangement within the American health care system invites adverse selection. Until such time that we make changes to the manner in which we acquire and receive health insurance, nothing will change and the risk to companies will remain. Changes to health care will continue to be made in Washington D.C. and will continue to impact the healthcare market, but you can make changes right now by being open and upfront with your employees about their options.

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What has been your experience with adverse selection in the insurance field? Please post your thoughts in the comments below.
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