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Healthcare Insurance: Effects of Adverse Selection

It is quite natural that those people who know or suspect that the probability of them falling sick is high are most likely to buy insurance. On the same note, many people do not like paying high insurance premiums than the expenses they are likely to incur in hospitals. Therefore, it goes without saying that people will go for insurance plans where they pay the minimal amount of premiums but get the maximum cover. This type of reasoning and action by the public is referred to as adverse selection. Adverse selection is more pronounced in the Medicaid insurance plan than the Medicare plan (Getzen 84). To begin with, Medicaid is tailored for the poor in society whose contribution is minimal. Additionally, Medicaid covers a significant number of nursing homes where the elderly are taken care of. Consequently, even the elderly who are covered by the Medicare eventually qualify for Medicaid after spending long time in nursing homes. Similarly, since paying for medical services individually is expensive, many poor people will choose to enroll for Medicaid (Getzen101).

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Rationality of the Uninsured

Though it has been argued that for security purposes everybody should have health insurance, some people still do not have it. These people prefer to pay for their medical expenses whenever they fall sick. It might seem as an irrational idea, but some people have said that it is actually economically rational. Firstly, if these people do not have health problems, they end up spending less than those who pay insurance premiums (Getzen 110). Secondly, these people avoid paying high insurance premiums regularly and can invest the money elsewhere. On the same note, the uninsured avoid the many regulations that are put in place when one buys insurance, for instance the in network coverage.

Physicians’ payment in the U.S.

In the United States, commercial insurance contracts cover the largest number of people under the age of 65 years. Consequently, they pay the huge amount to physicians compared to other insurance organizations. The commercial insurance contracts usually use the modified form of Medicare Resource-Based Relative Value Scale (RBRV’S) as a base for their payments. In other instances, the Medicare payment levels are used as a yardstick for payments (Getzen 115). It is important to note that mode of payment has changed from the initial use of fees structures, to the present use of relative value scales. This change has been necessitated by the large number of issues that payment modes have to address.

Relative Value Scale Determination

Initially, a common service was given one point while the other services were given points relative to this service. Thereafter, physicians and insurance firms agreed on the amount to be paid per point and payment was calculated based on the same. However, this changed with the introduction of RBRV’S where the estimates of point value is made based on different factors. The factors include; physician time, intensity of effort, practice costs as well as costs of advances specialty training (Getzen 114).


An agent is defined as a person who executes certain duties on behalf of another person for a fee. In the healthcare industry, physicians act as agents of patients. Though, an agent seems to increase the cost of a transaction, the knowledge and valuable information agents have end up reducing the ultimate cost incurred (Getzen 126). However, if agents carry out their duties under circumstances of imperfect information, they are bound to bring about problems which could have been avoided if the transaction was carried out directly.


Getzen, Thomas E. Wiley Pathways Health Care Economics. Hoboken: John Wiley and Sons, 2007. Print.

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