Medicare Buy-In & Adverse Selection

While Congressman Grayson should be applauded for his Medicare buy-in proposal, at least one fundamental issue needs to be worked out — how to deal with adverse selection.  Stated another way, how can we prevent Medicare from becoming private insurance companies' ‘dumping ground,’ filled with only the sickest Americans?

The adverse selection problem boils down to this: the people most eager to buy into Medicare would like to do so for good reason — they have had a negative experience with private health insurance. 

Dissatisfaction with one's insurance company is very likely to be closely linked how often one seeks medical treatment, i.e. how sick one is.

For example, someone who is chronically ill and constantly haggling with their insurance company to pay countless medical claims is more likely become fed up with private insurance, and be eager to buy into Medicare. 

In contrast, someone in near-perfect health, who very rarely seeks medical treatment, would be less likely to grow dissatisfied with private insurance.

The net result would be that a Medicare buy-in option would tend to attract a sicker than average pool of Americans, potentially making premiums prohibitively expensive.

How big of a problem would this be?  While I have not read any forecasts — and the CBO has not scored Congressman Grayson's proposal — if I had to venture a guess, I would say that the adverse selection problem would be huge.

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As we all know, private insurance companies, by design, seek to make a profit.  As a result, private insurers devote significant time and money into finding ways to deny medical claims.  This is no secret.  Within the insurance industry, patients’ medical claims that are actually paid out are referred to as "medical loss."  So, from an insurance company's perspective, boosting profits, and limiting "medical losses" go hand-in-hand.

In our current system, most Americans have no alternative to private insurance.  Someone fed up with the abusive practices of their current insurance company has no real alternative, since all of the other insurance companies follow more or less the same abusive practices that are designed to limit so-called "medical losses."

Now, if the government introduces a Medicare buy-in option, the insurance industry dynamic changes.  Suddenly, those Americans tired of fighting with their insurance company would actually have a real choice.  As a consequence, private insurance companies would have even more incentive to try to purge their rolls of the chronically ill, since private insurers would know full well that at some point, the chronically ill will just get fed up and seek sanctuary with Medicare.

Make no mistake — I believe Congressman Grayson's proposal is a bold step in the right direction, and I support his admirable efforts.  However, for a Medicare buy-in option to be feasible, the problem of adverse selection must be addressed.