It was supposed to be the beginning of my grandfather’s life. He had just married the love of his life, had two beautiful children, and received a well-paying job at Ventura Harbor Boatyard. After welding boats for many years, he decided that it was no longer the career for him. Luckily, his friend had opened up a post office nearby and offered my grandfather partial ownership. His dream was to start his own business, but his daughter was diagnosed with type two diabetes and he was unable to pay the expensive rates for treatment. The only way that he could afford the treatments was through the health insurance that was tied to his job, so he decided to stay at the boatyard for a few more years. As time progressed, this turned out to be a mistake. Although he was able to get treatment for his daughter, there was a great toll on his lungs from inhaling the toxic fumes while welding. This damage caused my grandfather to seek an earlier retirement. As a result, he lost his access to health care and income, which lead him to forgo treatment for his lungs. Without treatment, his condition deteriorated rapidly and he died two months before my mother, his daughter, gave birth to me. My grandfather was supposed to be in the prime of his life, but instead, he was no longer in mine.
My family is not the only one in the United States of America to experience the effects of limited to no healthcare. Since healthcare is tied to occupation and has remained relatively expensive otherwise, approximately 15.8% of the United States population were uninsured before the implementation of Obama Care (Swartz). In order to combat the expensive nature of healthcare, Potential recipients, who possess chronic conditions, abuse information asymmetry to acquire the same rates as those recipients who are healthy. The analysis of this circumstance is called the “death spiral”, and it is created when insurers cannot differentiate between those who are healthy and those who are not (Siegelman). As a result of this, companies must charge a higher price to encompass the costs for treating both healthy and unhealthy customers, which, in turn, causes the average price of healthcare to become higher then what the healthy recipients value it at. Due to the healthy individuals leave the market, the price of healthcare becomes disproportionately expensive for those who possess chronic conditions. Insurers have coined the term Adverse Selection to describe this phenomenon, the formal definition being when “insureds utilize private knowledge of their own riskiness” to decide when to “buy or forgo” healthcare (Siegelman). I know how Adverse Selection has affected my family but what are the effects of Adverse Selection in Healthcare on others?
As a direct result of Adverse Selection, “selection- related incentives” have become the way that insurance companies “direct[ly] regulate” the market (Glazer-McGuire). These incentives damage the “quality of service” offered to high-risk individuals in order to “discourage” those individuals from joining insurance plans (Glazer-McGuire). Furthermore, these incentives create an inefficient and unfair market which threatens the livelihood and longevity of the insurance market. This practice disqualifies those potential recipients with chronic conditions through the adjustment of coinsurance and deductibles solely based upon the individual's characteristics. Since the insurance company, such a Medicare, can not determine the hidden characteristics that make a potential customer risky, they rely on “observable characteristics”, such as “age, sex, welfare status, and county-of-residence”, to set prices “proportional” to the expected cost for treating the individual (Glazer-McGuire).
The process of risk-adjusted pricing does not take into account the actual qualities of a person that make them a risk to insure. Instead, it takes into account the quality of life that an individual endures in order to make an educated assumption on that individual's quality of health. These assumptions cause many individuals, that would otherwise be insured, to lose the ability to own affordable insurance. This leads to approximately 15.7 % of citizen between the ages of 24 and 44 to go uncovered solely based upon their standard of living (US Census Bureau). In addition, if a customer is known to possess a chronic condition then risk-adjusted pricing makes it impossible for these individuals to obtain any type of insurance that would make their medical bills feasible. According to Jennifer Wolff, the faculty director of the Johns Hopkins School of Public Health, “per capita, Medicare expenditures increased with the number of types of chronic conditions” (Wolff). On average insured Medicare recipients “without a chronic condition” paid $211 in expenditures while similar recipients “with 4 or more types of chronic conditions” paid $13, 973 in expenditures (Wolff). Adverse Selection leads to higher health care expenditures for those who already possess chronic conditions as well as those who have a lower standard of living.
Adverse Selection does not only affect unhealthy recipients, it also has a large impact on those healthy individuals that participate in the market. As a result of the phenomenon, the insurance companies use the principle of equity in their treatment of the healthy and unhealthy as they “distribute the burden of health care costs equally among the healthy and the sick” (Glazer-McGuire). By distributing the costs equally among the healthy and sick, when you can't determine whether an individual is either, it decreases the cost for those who are ill, but, in turn, increases the cost for those who are not ill. This a form of “social insurance” to protect healthy individuals if they were to become ill (Glazer-McGuire). In addition, healthcare spending will be moved away from activities that healthy individuals take part in and moved toward activities that the unhealthy take part in (Glazer-McGuire). If a healthy person does not become ill though, they lose on their investment in healthcare.
Society tries to combat the distribution of cost by combining private healthcare with an individual's job, 63% of all private healthcare is employment based (US Census Bureau). There are both beneficial and negative aspects of combining employment and healthcare. It is beneficial to employees as it lessens the financial burden they face by owning private insurance, but employees may become stuck in an occupation as it provides their health insurance. This is a crucial trade-off as selection-related incentives and risk-adjusted pricing becomes negligible when insurance is provided through an employer. Furthermore, employers who offer health care to their employees due to the employer mandate are eligible for tax credit predominantly, although the company's cost of production will increase due the insurance plans (“Small Employers That Already Offer Health Insurance.”). The most crucial benefit of tieing healthcare to employment is that the number of insured individuals decreased by 15% between the years of 2013-2017 (US Census Bureau). Adverse Selection causes health care to become more of an investment for those who are healthy, but, if they become sick, once can abuse Adverse Selection. If an individual does not become sick, there is a huge monetary loss in investment.
There is one case where Adverse Selection becomes extremely beneficial in a market; this is when the death spiral cannot take effect. The healthy individuals can not leave this market when the cost of healthcare exceeds the maximum advantageous value for them. This causes the price of healthcare to decrease as more healthy individuals enter the market, they become disproportionately large in comparison to the ill individuals. As this case becomes more prevalent, the cost of healthcare decreases significantly for both healthy and unhealthy individuals as the cost of treatment is split among a larger range of people. Not only does the cost of healthcare decrease, the efficiency of the market also increases (Spiegelman). A market such as this has extreme benefits to society as well as individuals.