Health insurance companies sometimes do not allow new...

Name: Problem 6, Chapter 11: Economics
Uploaded: 2021-09-17T13:54:13-08:00
Duration: 1 min 17 s
Channel: Kaylee Mcclellan
Description: Health insurance companies sometimes do not allow new participants to be covered on "existing conditions," or preexisting illnesses. Explain why this policy might alleviate problems of adverse selection.

Health insurance companies sometimes do not allow new participants to be covered on "existing conditions," or preexisting illnesses. Explain why this policy might alleviate problems of adverse selection.

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Key Concepts

Adverse Selection

Adverse selection is the process by which individuals who believe they are at high risk are more likely to purchase insurance than those who perceive themselves as low risk. This imbalance in the risk pool can lead to higher overall costs for the insurer, as the pool is composed of individuals who are more likely to make claims, resulting in elevated premiums or unsustainable losses.

Preexisting Conditions

Preexisting conditions refer to health issues that existed before an individual applied for or renewed an insurance policy. Excluding coverage for these conditions minimizes the risk of a disproportionate number of high-cost claimants entering or remaining in the insurance pool, thereby preventing scenarios where insurers are burdened by individuals with predictably high medical expenses.

Risk Pooling

Risk pooling is the mechanism by which insurers spread risk among a large group of people to reduce the burden of claims on any single entity. By excluding individuals with preexisting conditions, insurers aim to create a more balanced risk pool with a lower average risk, which helps in accurately pricing premiums and maintaining the financial stability of the insurance program.

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