Asymmetric Information in the Market for Health Insurance
https://www.aeaweb.org/articles?id=10.1257/aer.103.7.2643
This academic paper is titled Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts. Â It was published in the American Economic Review explores consumer inertia and adverse selection in health insurance markets. This paper directly correlates to our discussion on asymmetric information in markets. The market for health insurance is a prime example of a market with asymmetric information, as the people buying insurance know much more about their own health than the companies selling insurance. Despite varying risk levels person by person, the insurance company must charge a uniform price. Because of this, healthy people must pay more than the cost of what their medical care would be in order to be insured. This creates the phenomena of adverse selection, in which healthy people are less eager or willing to purchase insurance. Once some healthy people forgo insurance, the problem worsens, as the insured pool becomes unhealthier and the price of insurance goes up. More and more healthy people do not buy insurance. This asymmetric information causes adverse selection to the point where insurance is undesirable because it is so expensive.
This economic journal article explores the phenomena of adverse selection while also exploring inertia. Inertia involves poor health plan choice by consumers—inertia could be reduced with policies that nudge consumers towards better choices. Inertia is a consequence of asymmetric information. This is because inertia increases when it is difficult for buyers to analyze the costs and benefits of different health insurance plans or levels. The academic paper discusses the importance of considering the issues of inertia and adverse selection when creating healthcare policy. The research done by the author suggests that buyers of health insurance have a decent amount of risk aversion, contributing to inertia and adverse selection. The paper suggests that understanding the relationship between inertia and adverse selection in health insurance markets will allow policy-makers to improve consumer choices through incremental risk-based plan selection. The paper suggests that the benefits of reducing inertia could outweigh the losses from adverse selection.
Overall, the market for health insurance leads to adverse selection. Policies that reduce inertia could potentially cancel out these effects. People will only choose to purchase health insurance if they value it more than their alternatives. Because of the inherent imbalance of information in the health insurance market, adverse selection and inertia prevent health insurance from reaching its socially optimal outcomes. Studying this information asymmetry and ways to reduce it, as Benjamin Handel does in this academic paper, can lead to policies that may remedy the healthcare system problems in the United States.