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Private Health InsuranceA health insurance policy is a legal, binding contract between the insurance company and the customer. The largest difference between private sector health insurance and life insurance is that for life insurance, a person may purchase guaranteed renewable insurance for the hole of the insured's life at a constant premium rate, while health insurance is generally purchased year by year with generally no assurance of renewability and if renewable, no guarantee that premium rates will not increase. Any private insurance system will face two inherent challenges; adverse selection and ex-post moral hazard.Insurance companies use the term "adverse selection" to describe the tendency for only those who will benefit from insurance to buy it. Specifically, when talking about health insurance, unhealthy people are more likely to purchase health insurance because they anticipate large medical bills. On the flip side, people who consider themselves to be reasonably healthy may decide that medical insurance is an unnecessary expense; if they see the doctor once a year and it costs $250, that' much better than making monthly insurance payments of $400. The fundamental concept of insurance is that it balances costs across a large, random sample of people. For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100 per month. One of them gets really sick while the others stay healthy, which means that the insurance company can use the money paid by the healthy people to treat the sick person. Adverse selection upsets this balance between health and sick subscribers. It will leave an insurance company with primarily sick subscribers and no way to balance out the cost of their medical expenses with a large number of healthy subscribers. Because of adverse selection, insurance companies use a patient's medic al history to screen out persons with pre-existing medical conditions. Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, whether or not the person has been treated for any of a long list of diseases and so on. In general, those who look like they will be large financial burdens are denied coverage or charged higher premiums to compensate. On the other side, applicants can actually get discounts if they do not smoke and are healthy. Moral Hazard describes the state of mind and change in behavior that results from one's knowledge that if something bad were to happen, the out-of-pocket expense would be mitigated by an insurance policy---in this case, one which provides reduced prices for medical care. IN the same way that people treat water with little care when it is very inexpensive, people will also tend to overuse medical care when the out-of-pocket costs are small. Because of advances in medicine and medical technology, medical treatment is more expensive, and people in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more medical care than a young healthier population. These factors cause an increase in the price of private health insurance. Common complaints about private health insurance include: companies not announcing their health insurance premiums more than a year in advance, companies trying to charge different people different rates based on their own personal health, and that experimental treatments are not covered. |
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