Adverse Selection

Question 1

Adverse Selection

How is adverse selection created?

Answer 1

When employees can reasonably predict the probability of an occurence

Question 2

Adverse Selection

What variables is adverse selection dependent on?

Answer 2

• Availability of choice
• Predictability of occurrence

Question 3

Adverse Selection

Design Approaches to Control Adverse Selection

Answer 3

• Limit frequency of choice
• Limit degree of change
• Level spread between options
• Require proof of insurability before increasing coverage
• Group certain coverages together
• Delay full payment
• Offer HSA
• Maintain parallel design

Question 4

Adverse Selection

Anticipating Adverse Selection in Pricing

Answer 4

Adjustment of price tags for anticipated experience

• Load prices of lesser-valued options
• Push cost of adverse selection into highest=value option
• Spread cost of adverse selection over price of all options