How Does the Government Address Adverse Selection?
The government can address adverse selection and improve market
efficiency but this involves redistribution
Natural solution is to impose a mandate: everybody is required to
purchase insurance ⇒ If price is the same for everybody, low risk people
end up subsidizing high risk people
From a social perspective, being high risk (e.g. having a sickly constitution)
is rarely consequence of individual choices ⇒ Society might want to
compensate individuals for this
⇒ Explains why all OECD countries (except US until Obamacare) have
adopted universal health insurance
Obamacare three-legged-stool (a) forbids insurers from charging based on
pre-existing conditions, (b) mandates that everybody needs to get
insurance, (c) subsidizes health insurance for low income families
12 1