Health Insurance: Asymmetric Information Analysis

Used cars come in a variety of qualities from the worst, the lemons the cars that always are breaking down, to the very best the most reliable cars. The sellers know the quality of their cars, but suppose that the buyers cannot tell which used cars are lemons and which are of good quality. Since the sellers have more information than the buyers, this is a situational concept known as asymmetric information. This model of asymmetric information was described by the economist, George Akerlof, (Ross, 2015). Asymmetric information implies that the information known to one party may be unknown or only partially known or available to another, (Matthews, 2013). Asymmetric information is a fairly new studied concept in economics. Although information

Insurance markets have seen the effects of asymmetric information. In health insurance cases, consumers generally have more information about their health than the insurers do, asymmetric information. Health insurance consumers come in a range of health, but to insurance companies, everyone has the same average health. Joseph E. Stiglitz, one of the economists who shared the Nobel Prize in Economics with Akerlof, explained when insurance companies were effected by asymmetric information meaning they became more uncertain about their consumers, the uncertain health insurance premiums needed for high-risk individuals causes all premiums to rise. This forces low-risk individuals out of their preferred insurance

Market imperfections in the health insurance market create incentives for inefficient levels of coverage. With the ACA, U.S. citizens are required to purchase insurance or pay a fee for declining insurance. The goal of the ACA is to force all the healthy people into the insurance pool to moderate the cost of health insurance. Since asymmetric information causes adverse selection in the insurance market, it is difficult for healthy people to receive actuarially reasonable rates. The ACA is hoping to achieve that all people are to be covered at a reasonable rate. The Council of Economic Advisers finds that the ACA is, “(1) a genuine containment of the growth rate of health care costs, and (2) the expansion of insurance coverage”,( The Economic Case for Health Care Reform). On the contrary, this forced health insurance causes insurance companies to raise rates to cover cost of the increased number of consumers who are unhealthy. Healthy people find that paying the penalty for not having health insurance rather than buying insurance is cheaper. Healthy policyholders began dropping out of the insured pool, and the average health becomes more skewed because the insured pool would become increasingly uncertain with asymmetric information forcing insurers to raise their rates again, (Kuttner, 2014). Evidence that adverse selection is