Adverse selection The Cliometric Society

Adverse selection

The Cliometric Society profiles economic historian Melissa Thomasson. Thomasson specializes in the economic history of medical insurance and health care.

Her paper "Early Evidence of an Adverse Selection Death Spiral? The Case of Blue Cross and Blue Shield" explores competition between the non-profit insurers Blue Cross and Blue Shield, and emerging for-profit insurers. Adverse selection refers to "a process that occurs when individuals with different expected losses are charged the same premium, whereby those with low expected losses drop out of the insurance pool, leaving only individuals with high expected losses. Adverse selection can make it difficult to sustain private insurance markets." (World Bank):

"Thomasson (2004) examines the structure of the health insurance market and looks at the interplay between nonprofit and for-profit insurance companies under the employment-based system. Originally, the nonprofit Blue Cross and Blue Shield plans (the Blues) community rated their policies, meaning they charged individuals the same premium, regardless of risk. The Blues community rated, at least in part, as a way to rationalize their nonprofit status, arguing that they operated in the community interest. While the Blues were among the first groups to offer health insurance coverage, technological advances in medical care, increasing incomes, and several government policies passed in the early 1940s quickly served to bring more traditional, for-profit insurance companies into the health insurance market. For-profit insurance companies experience rated their policies, so that they charged lower premiums to their best (i.e. lower-risk) customers. Thomasson also finds that when for-profit insurance companies entered the market and experience rated their policies, they lured the best consumers from the Blue Cross plans, threatening the ability of the Blues to survive. In response, the Blues began to adopt community rating on a limited basis, which rapidly leveled the playing field. This trend continued; by the mid-1990s, several Blues plans jettisoned their nonprofit status — and the rating restrictions that accompanied it — in order to more ably compete with their for-profit competitors."

The profile is great reading, with brief summaries of Thomasson's papers and a set of references. There are about eight profiles of cliometrians and their work in the series: "CURRENT RESEARCH IN CLIOMETRICS. FEATURED CLIOMETRICIANS".