26 January 2007

Risk pool explanation

A Philadelphia Inquirer columnist, Andrew Cassel, gives his readers a good explanation of risk pools, something I was struggling to explain the other night. He writes that, “insuring people in large groups can be more efficient because risks are spread out. In effect, healthy individuals subsidize sick ones.
"Ideally, the same thing happens when people buy insurance on their own. Insurers balance the risks by signing up many individuals, expecting that only some will need health services at any given time.

"But there's a catch. In a competitive market, some insurers can focus on attracting people more likely to stay healthy - say, by offering lower rates to the young and affluent.
"That makes it harder or more expensive for those with higher risks to obtain coverage - a phenomenon economists call 'adverse selection.'"

Just one problem here. "Some" insurers try to screen out less healthy potential customers? "Some" insurers?

Cassel continues (before he was so rudely interrupted), "So if the current tax incentive goes away, what then?
"One alternative, of course, would be to put all Americans into one big insurance pool. That's the basis of the so-called single-payer idea: Have the government insure everyone, as Medicare does now for people over 65."

Of course.

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