I am finally getting into some of the books that I had intended to read over the summer but never got around to.
The first one is:
I am about half way into this one and I got into a chapter that was pretty relevant to some of the discussions we have had here.
He started talking about adverse selection in various contexts (Adverse selection - Wikipedia, the free encyclopedia
). One of which is health care.
To simplify, Insurance companies base thier rates on the average case. If the average male will incur 1500 dollars worth of medical expenses a year, they will charge 1600 for a policy and hope to make a profit. The ones that charge more expenses will balance out the ones who charge less. Pretty simple right?
Well that was then. This is now. Today we have access to ALOT of information that was not available before. We have CAT scans and genetic tests and all sorts of medical information to use. The problem this creates is that we are starting to get a really good idea of who will need alot of medical care and who won't. Adverse Selection is the situation where people who know they won't need 1500 dollars worth of care in a year simply opt out of the insurance because it's a bad deal for them. People who know that they will need alot more than 1500 dollars worth rush out to buy policies. That then changes the population, and the average cost goes way up. Lets say to 1800. So once the rates go up you push more people into the catagory of knowing they won't charge that much and more people opt out. This cycle continues until the insurance industry collapses.
We have done a few things to mitigate this like writing huge group policies for say the UAW, where everyone gets insurance no matter what and it spreads the risk out making it profitable once again.
The problem is that these sorts of big sweeping coverage plans are starting to get really expensive and they are going away. What this leaves us with is the death spiral of adverse selection where rates will continue to go up as people continue to opt out of the system, armed with better and better medical knowledge.
SO what do we do? There are really only two solutions. Leaving it to the private market won't work in this case. We have to either mandate that everyone get a policy so that people can not opt out ( like the Romney Plan) or provide a government health plan for everyone paid for with a tax increase.
What other solution is there? Clearly leaving things as they are now is going to become impossible in the near future. We better do something sooner rather than later.