Academic journal article JITTA : Journal of Information Technology Theory and Application

Bundling Economics under Adverse Selection in the Individual Health Insurance Market

Academic journal article JITTA : Journal of Information Technology Theory and Application

Bundling Economics under Adverse Selection in the Individual Health Insurance Market

Article excerpt

ABSTRACT

We examine the impact of bundling strategies on the level of consumer participation and premium rates realized in an individual health insurance market characterized by an adverse selection problem. In this context we show that society may use private insurers to attain universal coverage at equitable premiums under a pure bundling strategy, where insurers offer only a comprehensive policy to the market. This result is strengthened as the number of medical conditions covered in the comprehensive policy increases and as applicant risk aversion increases. When insurance applicants exhibit low levels of risk aversion a mixed bundling strategy (or offering single-disease policies along with the comprehensive policy) improves consumer participation and decreases premium rates when compared to a pure bundling strategy. In this case market performance is improved by increasing policy options offered to applicants. Alternatively, when insurance applicants exhibit moderate levels of risk aversion a mixed bundling strategy reduces consumer participation and increases premium rates when compared to a pure bundling strategy. In this case market performance is improved by reducing policy options offered to applicants. In addition, when insurance applicants exhibit sufficiently high levels of risk aversion the consumer participation and premium rates realized under a pure bundling strategy and mixed bundling strategy converge toward full market participation. Finally, under all levels of risk aversion we show that offering an exclusion policy along with the comprehensive policy decreases consumer participation.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

As technological advances continue to improve individuals' assessments of their personal health risk factors, privacy legislation continues to restrict insurers' use of such information to design insurance policies. Advances in biological research and medical technology, through the advent of genetic testing, have provided individuals and their doctors with more accurate assessments of their genetic predisposition for a large and growing number of medical conditions (Murry, Wimbush, and Dalton 2001). Applicants may use this genetic information to purchase the most advantageous health insurance policy available to them in terms of premium rates and coverage levels. Alternatively, insurance companies able to access this information may engage in genetic discrimination, the practice of denying coverage to, or pricing policies for, individuals based on their genetic predispositions to certain medical conditions (Gostin 1991). However, industry regulators, consumer advocates, ethicists, and others argue that genetic discrimination is unfair to applicants who have inherited a genetic predisposition over which they have no control. Therefore, regulators at both the state and federal levels have implemented genetic privacy legislation that prohibits the discriminatory use of genetic information (e.g., genetic test results, family history, and medical history) by insurance companies (Baderian and Selzer 2001).

The information asymmetries created by these technological and regulatory trends may create an adverse selection problem in the individual health insurance market in which fewer individuals are covered by health insurance. In previous work we have shown that genetic privacy legislation will force lower risk individuals, who are no longer able to signal their low risk status to insurers and receive preferential policies, to obtain less coverage than they would in the absence of regulatory interference, while higher risk individuals continue to pay premiums that are not significantly better than they would have been without regulation. Essentially, no one is made better off under genetic privacy legislation, while some individuals are demonstrably made worse off (Clemons and Thatcher 1997; Thatcher 1998). In order to sustain the viability of the insurance market insurers must design a menu of insurance policy options to mitigate this adverse selection problem and to restore consumer participation at affordable premiums. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.