Henderson on Kunruether et al
But Kunreuther, Pauly, and McMorrow show that when insurance regulators themselves don’t cause adverse selection, it tends not to happen. They write:
Where adverse selection does potentially occur, and to a serious degree, is in markets where regulation prevents insurers from taking into account risk information they surely could have. This “artificial” or “non-essential” adverse selection seems to be most characteristic of health insurance and property insurance markets where “risk rating” is prohibited by law (as in some states in the United States and in all group health insurance) or regulators depress premiums for high-risk exposures for political reasons (as in hurricane insurance in Florida).
In an article I wrote in 1994, I called this “adverse selection by law.” By contrast, they note, “in individual health insurance markets in the United States where risk rating is permitted, adverse selection is absent.” [Emphasis mine.]
This is from my review of Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry by Howard C. Kunreuther, Mark V. Pauly, and Stacey McMorrow. It appears in the latest issue of Regulation.
There is much good content in the book and I highlight it in my review. I have one major disappointment though. I write:
In a chapter titled “Design Principles for Insurance,” the authors lay out three principles for insurance regulation. Interestingly, although they never come out and say it, all three principles, if followed, would lead to less regulation. The principles are:
• Avoid premium averaging.
• Do not mandate insurance benefits not worth their cost.
• Examine impacts of crowding-out effects on behavior.
The first, if followed, would end one of the key features of Obamacare: its prohibition of insurance companies pricing for risk, which means, in essence, Obamacare’s prohibition of insurance, and replacing it with socialized health costs using private companies as intermediaries. The second principle, if followed, would mean getting rid of Obamacare’s requirement that health insurance companies pay for various tests–mammograms, Pap smears, and prostate PSA tests, for example–without charging a co-payment to beneficiaries. The authors do not point out either of those two implications of their principles. That’s a disappointment because the book was published almost three years after Obamacare was passed. It seems as if the authors decided to pull their punches in precisely the area where their work could have had one of its biggest effects.