Since people who don’t get their health insurance at work have the choice of being insured or not, and since the healthier people who have health insurance subsidize the less-healthy people who have health insurance, some healthy people, especially healthy younger people without families, are going to decide to go without health insurance. That’s the “adverse selection” problem.
Insurance companies selling health insurance to individuals try to weed out bad risks. That isn’t “adverse selection;” that’s “underwriting” or “risk-classification,” which is what insurers do to resist adverse selection. (Health insurers get to do it not only before issuing a policy but after; that’s called “recission.” And they also get to raise rates once someone has gotten sick, which rather defeats the idea of “insurance.”)
Underwriting is never perfect. So we should expect that, among those without employer-paid health insurance, uninsured people will be, on average, healthier than insured people. That’s why we need some sort of mandate: an individual mandate, an employer mandate, or both.
I can’t make sense of the apparent belief of Alex Tabarrok and Megan McArdle that evidence that uninsured people are actually healthier than average refutes, rather than supporting, the existence of an adverse selection problem and the need for public intervention.
Footnote The adverse-selection problem doesn’t stop with the decision to buy health insurance. Healthy people will also tend to buy very-high-deductible “catastrophic” insurance. Wherever there’s choice in the purchase of insurance products, there’s adverse selection.
Second footnote Risk-classification uses up real resources. From a social perspective, those resources are wasted, since someone’s going to pay the bill eventually: the insurer, the patient, or everyone else via providers’ unpaid-care accounts.
Third footnote If all this seems confusing, it’s because the rhetoric of liberal health-care reformers always paints the uninsured as victims rather than free-riders.
Update Mark Thoma agrees. Unlike me, he has a license to opine on these matters.
