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Illustrating Adverse Selection in Health Insurance Markets with a Classroom Game

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  • Jennifer M. Mellor

Abstract

This paper describes a classroom game that illustrates the effects of asymmetric information and adverse selection in health insurance markets. The first part of this game simulates a market in which buyers can purchase insurance from sellers; in some periods, government regulation prevents sellers from using information about buyer type to determine premiums. The results demonstrate the classic prediction that asymmetric information will result in adverse selection. Here, low‐risk buyers will forego the purchase of insurance at a measurable loss of potential earnings. In the second part of the game, sellers and buyers can trade two different types of health insurance policies, one moderate and another generous. Under government‐mandated community rating and limits on premium increases, no buyers will purchase the generous plan. Questions are provided to stimulate discussion of the causes and consequences of adverse selection for consumers and insurers and possible solutions for employer‐ and government‐sponsored programs.

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  • Jennifer M. Mellor, 2005. "Illustrating Adverse Selection in Health Insurance Markets with a Classroom Game," Southern Economic Journal, John Wiley & Sons, vol. 72(2), pages 502-515, October.
  • Handle: RePEc:wly:soecon:v:72:y:2005:i:2:p:502-515
    DOI: 10.1002/j.2325-8012.2005.tb00716.x
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    1. Charles A. Holt & Roger Sherman, 1999. "Classroom Games: A Market for Lemons," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 205-214, Winter.
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    3. David M. Cutler & Sarah J. Reber, 1998. "Paying for Health Insurance: The Trade-Off between Competition and Adverse Selection," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 433-466.
    4. Thomas R. Oliver, 1999. "The dilemmas of incrementalism: Logical and political constraints in the design of health insurance reforms," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 18(4), pages 652-683.
    5. Buchmueller, Thomas C. & Feldstein, Paul J., 1997. "The effect of price on switching among health plans," Journal of Health Economics, Elsevier, vol. 16(2), pages 231-247, April.
    6. Ilayperuma Simon, Kosali, 2005. "Adverse selection in health insurance markets? Evidence from state small-group health insurance reforms," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1865-1877, September.
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