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Illustrating Adverse Selection in Health Insurance Markets with a Classroom Game
Author(s) -
Mellor Jennifer M.
Publication year - 2005
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2005.tb00716.x
Subject(s) - adverse selection , government (linguistics) , information asymmetry , earnings , business , health insurance , group insurance , selection (genetic algorithm) , actuarial science , auto insurance risk selection , insurance policy , marketing , economics , key person insurance , finance , health care , general insurance , income protection insurance , philosophy , linguistics , artificial intelligence , computer science , economic growth
This paper describes a classroom game that illustrates the effects of asymmetric information and adverse selection in health insurance markets. The first part of this game simulates a market in which buyers can purchase insurance from sellers; in some periods, government regulation prevents sellers from using information about buyer type to determine premiums. The results demonstrate the classic prediction that asymmetric information will result in adverse selection. Here, low‐risk buyers will forego the purchase of insurance at a measurable loss of potential earnings. In the second part of the game, sellers and buyers can trade two different types of health insurance policies, one moderate and another generous. Under government‐mandated community rating and limits on premium increases, no buyers will purchase the generous plan. Questions are provided to stimulate discussion of the causes and consequences of adverse selection for consumers and insurers and possible solutions for employer‐ and government‐sponsored programs.