Discussion Topic 1
Discussion Topic 1
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Adverse Selection and Favorable Selection
Adverse selection occurs when sellers possess information that consumers lack or consumers have information that sellers lack. This situation exploits asymmetric information, also information failure, which occurs when a transacting party has more material knowledge than the other party. In most circumstances, the seller is the more knowledgeable party (Hayes, 2022). In terms of insurance, high-risk patients tend to purchase insurance on higher premiums or life insurance in this selection. Favorable or advantageous selection adopts data that indicate service utilization tendency and predicts that high-death risk individuals would not pay for life insurance. It means that beneficiaries costing less than average after adjusting for particular demographics and clinical attributes disproportionately signed for Medicare Advantage, while those costing above average have disproportionately continued with traditional Medicare (Newhouse et al., 2016). The expectation is that a particular patient group will show lower than anticipated health service utilization. (Discussion Topic 1)
Implications
Generally, adverse selection tends to raise costs because consumers lack information help from insurers, creating an asymmetry in the insurance plans. In health insurance markets, adverse selection causes plan price distortions that cause inefficiencies in sorting customers across health plans. Medicare, the private individual market, the employer-sponsored market, consumer-directed health plans, and even the ACA should understand and take caution that adverse selection puts the insurer at an increased risk of losing money via the predicted claims (Cliff et al., 2022). These situations increase premiums that increase adverse selection further as healthier individuals opt from buying the increasingly unaffordable coverage. (Discussion Topic 1)
References
Cliff, B. Q., Miller, S., Kullgren, J. T., Ayanian, J. Z., & Hirth, R. A. (2022). Adverse selection in Medicaid: evidence from discontinuous program rules. American Journal of Health Economics, 8(1), 127-150. https://www.nber.org/system/files/working_papers/w28762/w28762.pdf
Hayes, A. (2022). Adverse selection: definition, how it works, and the lemons problem.
Newhouse, J. P., Price, M., Huang, J., McWilliams, J. M., & Hsu, J. (2016). Steps to reduce favorable risk selection in medicare advantage largely succeeded, boding well for health insurance exchanges. Health affairs (Project Hope), 31(12), 2618–2628. https://doi.org/10.1377/hlthaff.2012.0345
