ABSTRACT
In voluntary, unregulated insurance markets, health insurers will try to separate consumers into distinct risk groups and set premiums to cover the expected costs of care for each group. As a result, however, the highestrisk individuals may be unable to find affordable insurance or may be denied insurance. Insurance regulations are aimed at helping the sick obtain coverage by limiting insurers’ ability to segment risk and forcing more risk pooling. However, if insurers are unable to segment risk, adverse selection – a greater likelihood of participation in the market by higher-risk consumers than by lower-risk consumers – may occur. For the market as a whole, adverse selection may drive prices to a level at which the market is not viable or at least not attractive to low risks. Individual insurers who experience adverse selection will suffer losses and will be unwilling to supply insurance. Insurers thus have an incentive to adopt new means to segment the market to avoid adverse selection. If they are able to do so, then regulations may not help in making insurance available and affordable for the sick.
