Adverse Selection and the Challenges to Stand-Alone Prescription Drug Insurance
- Topics:
- Insurance
- Tags:
- Business Operations,
- Corporate Insurance,
- Finance,
- Financial Planning,
- Insurance,
- National Bureau Of Economic Research
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Overview: This paper investigates a possible predictor of adverse selection problems in unsubsidized "standalone" prescription drug insurance: the persistence of an individual's high spending over multiple years. Using MEDSTAT claims data and data from the Medicare Survey of Current Beneficiaries, the paper finds that persistence is much higher for outpatient drug expenses than for other categories of medical expenses. It then use these estimates to develop a simple and intuitive model of adverse selection in competitive insurance markets and show that this high relative persistence makes it unlikely that unsubsidized drug insurance can be offered for sale, even with premiums partially risk adjusted, without a probable adverse selection death spiral.
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Format: PDF | Size: 209KB | Date: Aug 2003 | Pages: 37
