Insurance: Insurer's Perspective (Part II)
Blue Cross Blue Shield might encourage you to walk a mile in your own shoes to keep their expenses down, but let’s also try to walk in theirs.
1. Haunted House Insurance Market?
In the spirit of October, what is caused by a deep, dark secret and is an omnipresent specter…in insurance? Without perfect knowledge of a consumer’s health status, the insurer is “in the dark,” fearing the worst: adverse selection. A simple definition of adverse selection is: those who want health insurance the most tend to be sicker!
2.Something strange...and it don’t look good!
Here’s the insurer’s problem: If an insurer charges a premium based on the average cost of a consumer in the market, by construction, approximately half the consumers find this a bargain and half will think it too expensive. If the healthy half decides to pass up the chance to enroll, then suddenly the insurer’s realized costs rise dramatically. Repeat this enough and we have the DEATH SPIRAL- where premiums are so high only extremely sick people are willing to enroll.
3. Ghostbusting and the ACA.
DEATH SPIRAL is quite dramatic, so what to do? The answer had been: Let insurers charge different prices for different pre-existing conditions. Premiums match expected costs. But the ACA made this (admittedly unpopular!) practice illegal. Now how to prevent the death spiral? The individual mandate was the proposed solution (also admittedly unpopular). If healthy people are legally required to buy insurance, average costs now fold in the inexpensive folks and premiums hopefully stay low. I’ve put more discussion on Death Spiral, the ACA, and long-term implications for the U.S. in this video.