Impact of Adverse Selection on Private Health Insurance
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages Description/Paper Instructions
Impact of Adverse Selection on Private Health Insurance
Read the article and discuss the impact of adverse selection on private health insurance. How was the problem of adverse?
selection in health insurance solved by many nations? What were the three central features of Obamacare? Why was the
Obamacare progress imperiled?
Article by Robert H. Frank
The Affordable Care Act needs help. After scores of failed repeal attempts, Congress enacted legislation late last year that
eliminated one of the law’s central features, the mandate requiring people to buy insurance.
Obamacare, as the Affordable Care Act is widely known, isn’t in imminent danger of collapse, but the mandate’s repeal
poses a serious long-term threat.
To understand that threat and how it might be parried, it’s helpful to consider why the United States has relied so heavily
on employer-provided insurance — and why it has not yet adopted a form of the universal coverage seen in most other
countries.
First, some basics on private insurance: It works well only when many people, each with a low risk of loss, buy in. Most
homeowners buy fire insurance, for example, and only a small fraction file claim annually. A modest premium can
therefore, cover large losses sustained by a few.
But because of what economists call the adverse-selection problem, this model can easily break down for private health
insurance. People typically know more about their own health risks than insurers do, making those most at risk more
likely to purchase insurance.
This drives premium up, making insurance still less attractive to the healthiest people. That, in turn, causes many to drop
out, producing the fabled “death spiral” in which only the least healthy people remain insured. But at that point, private
health insurance may no longer be viable, because annual treatment costs for serious illnesses often exceed several
hundred thousand dollars.
Most nations have solved this problem by adopting universal coverage financed by taxes. The United States probably
would have followed this approach except for a historical anomaly during World War II. Fearing runaway inflation in
tight labor markets, the American government imposed a cap on wages.
But the cap didn’t apply to fringe benefits, which employers quickly exploited as a recruiting tool. Employer health plans
proved particularly attractive, since their cost was a deductible expense and they were not taxed. Before the war started,
only 9 percent of workers had employer-provided insurance, but 63 percent had it by 1953.
To be eligible for favorable tax treatment, companies were required to make their plans available to all employees, which
mitigated the adverse-selection problem. People would lose insurance if they lost their jobs, which inhibited labor mobility,
but since employment relationships were relatively durable in the postwar years, this arrangement worked well enough.
But after peaking at almost 70 percent in the 1990s, employer coverage began declining in the face of stagnating wages
and rising insurance costs. By 2010, only 56 percent of the nonelderly American population still had workplace health
plans.
Even so, because more than 100 million Americans still had such plans and were reasonably satisfied with them, the
Obama administration opted to build health reform atop the existing system. In addition to allowing people to keep their
existing employer coverage, Obamacare expanded eligibility for Medicaid and established exchanges in which people
without employer plans could buy insurance.
At the outset, Obamacare had three central features:
• Insurers could not charge higher prices to people with pre-existing conditions.
• Those without coverage had to pay a penalty to the government (the “mandate”).
• Low-income people would be eligible for subsidies.
The first two provisions were necessary to prevent the death spiral, and government couldn’t mandate insurance
purchases without adding subsidies for the poor.
Despite a bumpy rollout and some frustrations over shrinking choices and rising prices at health care exchanges,
Obamacare was working remarkably well by most important metrics. Program costs were much lower than expected, and
the uninsured rate among nonelderly Americans fell sharply — from 18.2 percent in 2010 to only 10.3 percent in 2018.
This progress is now imperiled.
The mandate — by far the program’s least popular provision — was repealed as part of tax legislation passed in
December 2017. And because economists predict that its absence will slowly rekindle the insurance death spiral, we’re
forced back to the policy drawing board.
The most common response has been to call for a variant of the single-payer systems employed by most other countries,
which promise dramatic reductions in health costs.
The United States spends far more on health care than any other nation, yet gets worse outcomes on most measures. In
part this is because administrative and marketing expenses are much lower under single-payer plans. But by far the most
important source of savings is that governments are able to negotiate much more favorable terms with service providers.
Virtually every procedure, test, and drug costs substantially more here than elsewhere.
An American hospital stay, for example, costs more than twelve times as much as one in the Netherlands. The single-payer
approach also sidesteps the thorny mandate objection by covering everyone out of tax revenue.
A June 2017 poll showed that 60 percent of Americans said the government should provide universal coverage, and
support for single-payer insurance rose more than one-third since 2014.
Yet a move to a single-payer system faces the same hurdle that shaped Obamacare: Millions of Americans would resist any
attempt to take their employer-provided plans away. And although single-payer health care would be far less costly overall,
it would be paid for by taxes — the most visible form of sacrifice — rather than by the implicit levies that underwrite
employer coverage.
From a purely economic standpoint, the increased tax burden is irrelevant. It’s a truism that making the economic pie
larger necessarily makes it possible for everyone to get a larger slice than before. And because the gains from single-payer
insurance would be so large, there must be ways to make everyone come out ahead, even in the short run.
The Yale political scientist Jacob Hacker, for example, has proposed the introduction of Medicare Part E (Medicare for
Everyone), which would allow anyone to buy into Medicare, regardless of age. The program’s budget would be supported
in part by levies on employers that don’t offer insurance.
The cost savings inherent in this form of single-payer coverage would lead more and more firms to abandon their current
plans voluntarily. Gradually, the age for standard Medicare eligibility also would fall until the entire population was
covered by it. The Center for American Progress has now introduced a similar proposal.
It’s critical to realize that there are attractive paths forward. In no other wealthy country do we see people organize bake
sales to help pay for a neighbor’s cancer care. We can avoid this national embarrassment without requiring painful
sacrifices from anyone.
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