Adverse selection, cross-subsidy, and a public health plan option

If a public plan falls victim to adverse selection, that would reduce the claims paid by private insurers.

Megan McArdle thinks that a public option would require a subsidy, because the public plan would not risk-classify (e.g., by pre-existing condition) or otherwise try to avoid attracting customers with higher-than-average health-care utilization. The public plan would therefore fall victim to adverse selection, with sicker people choosing the public plan and healthier ones the private plans, and would require a subsidy to stay in business. That would be bad, she says, because the subsidy would need to be fed by tax revenue.

But if that’s the case, then the private insurance plans actually benefit twice from the presence of a public plan: once by getting rid of bad risks, and again through the shrinkage in unpaid-care accounts. If I’m someone with private insurance now, I’m not sure why I should mind having my taxes go up if my health insurance premiums go down. Money is, after all, fungible.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: