David R. Henderson  

Henderson on Kunruether et al

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But Kunreuther, Pauly, and McMorrow show that when insurance regulators themselves don't cause adverse selection, it tends not to happen. They write:

Where adverse selection does potentially occur, and to a serious degree, is in markets where regulation prevents insurers from taking into account risk information they surely could have. This "artificial" or "non-essential" adverse selection seems to be most characteristic of health insurance and property insurance markets where "risk rating" is prohibited by law (as in some states in the United States and in all group health insurance) or regulators depress premiums for high-risk exposures for political reasons (as in hurricane insurance in Florida).

In an article I wrote in 1994, I called this "adverse selection by law." By contrast, they note, "in individual health insurance markets in the United States where risk rating is permitted, adverse selection is absent." [Emphasis mine.]


This is from my review of Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry by Howard C. Kunreuther, Mark V. Pauly, and Stacey McMorrow. It appears in the latest issue of Regulation.
There is much good content in the book and I highlight it in my review. I have one major disappointment though. I write:
In a chapter titled "Design Principles for Insurance," the authors lay out three principles for insurance regulation. Interestingly, although they never come out and say it, all three principles, if followed, would lead to less regulation. The principles are:
• Avoid premium averaging.
• Do not mandate insurance benefits not worth their cost.
• Examine impacts of crowding-out effects on behavior.
The first, if followed, would end one of the key features of Obamacare: its prohibition of insurance companies pricing for risk, which means, in essence, Obamacare's prohibition of insurance, and replacing it with socialized health costs using private companies as intermediaries. The second principle, if followed, would mean getting rid of Obamacare's requirement that health insurance companies pay for various tests--mammograms, Pap smears, and prostate PSA tests, for example--without charging a co-payment to beneficiaries. The authors do not point out either of those two implications of their principles. That's a disappointment because the book was published almost three years after Obamacare was passed. It seems as if the authors decided to pull their punches in precisely the area where their work could have had one of its biggest effects.



COMMENTS (4 to date)
Tom West writes:

Obamacare's prohibition of insurance, and replacing it with socialized health costs using private companies as intermediaries.

It would seem odd to criticize Obamacare as bad insurance when it's pretty much acknowledged that it's mean to replace insurance, addressing concerns that insurance isn't supposed to address.

If government policy is any indication of popular desire, then it appears that world-wide, the strong majority don't *want* health insurance, preferring instead insulation from health costs, which is a totally different beast.

Tom Nagle writes:

While I agree with you in principle, I think you would find the specific examples you cite for "the second principle" are not correct. Preventative tests like Mammograms, Pap smears, and (until a recent study) PSA tests are usually covered 100% by even high-deductible insurance plans because they are seen as highly cost effective in catching things while still treatable. The mandated cost-ineffective care that has driven insurance costs to current levels is for treatments, usually late in life (e.g., chemo treatments that cost >$100K to extend expected life span by a couple months,and hip replacements for very old people with advanced dementia.). The Democrats tried to get cost-effectiveness reviews of treatments into the bill. The Republicans labeled those reviews "Death Panels" that would "deny care" to the elderly when, in fact, the proposal was only to deny reimbursement, not to prevent people from paying for uncovered treatments on their own.

Tracy W writes:

I find myself doubtful. Eg in NZ private health insurance is fairly unregulated as it's mostly a way of skipping the public healthcare system's waiting lists but premiums have been rising faster than inflation, particularly for the elderly, and anecdotally some have dropped out - my gran did for example.

Charley Hooper writes:

Tom West,

That's a good point. However, I see the primary function of Obamacare as wealth transfer. After all, even a family of four making $94,000 can get subsidies. Secondarily, it is for insulation from health care costs, increased government control, the promotion of "essential benefits," and an easier way for uninsured people to get insurance.

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