The term may be taken to apply to any scheme in which the insurance rates for some high-risk persons are subsidized through higher-than-experiencerates for some low-risk groups or persons. Uniform rates for a population of different risks is an example. It is shown that such a scheme is inefficient in the same way as any partial excise tax is inefficient. It causes low-risk persons to buy too little insurance, and high-risk persons to purchase too much insurance. The relationship of community rating with moral hazard is investigated. Finally, indemnity insurance is shown to have some advantages over health insurance in which reimbursement is based on costs or charges, but it is unlikely to arise in a competitive system. Two statements in an important article by Kenneth Arrow provide the basis for the discussion in this paper. The first refers to the optimality of rating schemes: Hypothetically, insurance requires for its full social benefit a maximum possible discrimination of risks. Those in groups of higher incidence of illness should pay higher premiums. [1, p. 963].
No takes yet. Share an insight, caveat, or question.
Mark V. Pauly (1970) studied this question.