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Principles in Health Economics and Policy$
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Jan Abel Olsen

Print publication date: 2009

Print ISBN-13: 9780199237814

Published to Oxford Scholarship Online: May 2010

DOI: 10.1093/acprof:oso/9780199237814.001.0001

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Uncertainty and health insurance

Uncertainty and health insurance

Chapter:
(p.107) Chapter 7 Uncertainty and health insurance
Source:
Principles in Health Economics and Policy
Author(s):

Jan Abel Olsen

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199237814.003.0007

This chapter shows that there is a welfare gain from health insurance because people are risk averse with respect to the financial implications of the prospect of ill health. There are effectively two main types of asymmetric information related to health insurance: adverse selection, where the asymmetry occurs before the insurance contract is made; and moral hazard, where the asymmetry occurs after the contract is made. Two different bases are presented for pricing health insurance: individual rating and community rating. The arguments in favour of individual rating are: i) it offers consumers a choice of contracts; ii) people have financial incentives for healthy behaviour; and iii) there is no forced cross-subsidy, i.e. it is actuarially ‘fair’. The arguments against individual rating are: i) it involves adverse selection (market failure); ii) transaction costs are high due to false signalling of risks; and iii) access depends on income (‘unfair’). The simplest policy solution to adverse selection, high transaction costs, and unequal access is compulsory public insurance, to which we now turn. Exercises and suggested readings are included at the end of the chapter.

Keywords:   health care, health insurance, risk averse, welfare gain, adverse selection, moral hazard

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