Thursday, May 29, 2008

GINA, The Bad News: Adverse Selection

This is the second post in a series of posts in which I share what I see as the ups and downs of the Genetic Information Nondiscrimination Act of 2008 (GINA or H.R. 493).

Although the legislation will hopefully do much to encourage research and protect predictive health patients, GINA is not all roses. The legislation has numerous critics who have good reasons to be critical. For starters, it sets the stage for adverse selection to occur in the health insurance industry.

Adverse selection happens when an information gap emerges between the beneficiary and the insurer; if the beneficiary knows much more than the insurer, then the insurer is unable to accurately assess the beneficiary’s risk. This information imbalance results in more claims being made than the insurer reasonably predicted. GINA facilitates this phenomenon by allowing beneficiaries access to genetic information, but denying it to insurers. If, for example, a beneficiary finds out from a genetic test that he has a significantly increased risk of developing prostate cancer, he would use that information in deciding whether or not to purchase insurance, but the insurer would be unaware of that increased risk in deciding in which group the individual should be placed, what rate he should be charged, etc.

This is potentially a big problem in the insurance industry, because insurers need to be able to accurately determine risk in order to prevent claims exceeding predicted levels. In the long run, inaccurate risk predictions in the industry will result in rate hikes, and rate hikes will drive healthier participants out of groups. In a the worst case scenario, this could start a downward spiral in the direction of group or insurer insolvency. - Sam Beasley


Unknown said...

I received this comment by email and thought it would be worth posting here. - J.O.

"Question: Assuming GINA makes health insurance less tenable, will it thereby strengthen the political viability and/or implementality of health care reform?"

Dale said...

Adverse selection is not necessarily a bad thing. Roughly speaking, it means people who are more likely to need insurance are more likely to buy insurance. That isn't what insurers want. But why wouldn't it be what you want?

Keith Robison said...

In response to the previous commenter: long-term, insurance is about collecting a little from many people so you can pay a lot to a few. If payouts consistently outpace inflows, the company goes bust.

Insurance companies aren't (completely) dumb -- they will exit such a business before it destroys them OR raise the rates for such insurance to adjust for their uncertainity on how much is paid out. Any of these three ways (bust company, company exits business, company raises rates), fewer people who could benefit from the insurance will be able to access it.

there ain't no free lunch