ADVERSE SELECTION AND MORAL HAZARDS OF HEALTH INSURANCE
The health insurance industry is in boom these days but these companies face a great deal of problems, two of which basically determine the future of their businesses. These two problems are what they call the adverse selection, and the ex-post moral hazard.
The problem of adverse selection arises from the limited number of the insurance’s target market. Over the years, they have seen that the pool of clients they get are usually those that are most likely to use it—the unhealthy people. Since there are people who consider themselves “healthy” (as per personal standards), they see health insurances as unnecessary expense. This notion pushed the industry into a breakeven, hence, having them make the decision to inform people of the benefits from having insurances stashed away.
The ex-post moral hazard on the other hand makes the insurance provider hold back in getting into deals. A moral hazard means involving a third party to shoulder the cost of something in which the other two parties had decided without consulting the said party. An example of this would be conducting a series of tests that would certain the diagnosis of the doctor. Doing this will save the doctor from a malpractice suit and the patient getting a more comprehensive treatment, all the while the insurance provider being burdened by extra costs not covered by plan the insurer purchased.
Should these two problems continue to impede the providers from getting past the breakeven, chances are that the industry will decline.