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Adverse selection may be making health insurance prohibitively expensi

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Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post Updated on: 13 May 2018, 00:55
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Adverse selection may be making health insurance prohibitively expensive for the unemployed. In this negative feedback loop, rising insurance premiums cause the healthiest consumers to opt out of their plans, increasing the average risk of the pool. Insurers raise prices to offset that increased risk and the cycle begins again. Health insurance companies typically establish a standard rate, based on the average risk of the group, for a particular segment of the population. Among those who purchase individual insurance, consumers in poorer health are more willing to pay for such insurance because they have higher-than-average health care costs. Healthier consumers however, often forgo such insurance, reasoning that it is cheaper to pay directly for their lower-than-average health care costs. Among employers that offer health insurance, most obligate all employees, healthy or otherwise, to enroll in the employer’s group plan. Further, because a minimum health level is often required in order to fulfill job requirements, employer group insurance plans effectively pre-screen for a minimum level of health. Insurance companies can typically charge a lower premium to these groups, based on the lower average risk of the entire employee pool, without worrying that healthy employees will opt out of the plan as individual consumers might.
1. The passage suggests that which of the following would be most likely to reduce the occurrence of adverse selection in the health insurance industry?

(A) Higher insurance rates for employers with older-than-average employees
(B) Protection from lawsuits alleging discrimination against consumers in poor health
(C) Legislation requiring the healthiest consumers enrolled in a given insurance plan to pay premiums comparable to those of the unhealthiest members
(D) Individual insurance rates that are affordable enough to persuade healthy consumers to purchase health insurance
(E) Legislation requiring all employers to provide health insurance to their employees



2. The “negative feedback loop” mentioned in the second sentence can best be described as a situation in which

(A) those affected by that situation intentionally created the situation in the first place
(B) opposing parties cannot come to consensus or solve a problem
(C) the affected groups can no longer afford to participate in that situation
(D) companies make decisions based upon business interests as opposed to employee interests
(E) a series of understandable decisions continually escalates in a damaging manner

The second and third sentences state: “In this negative feedback loop, rising insurance premiums cause the healthiest consumers to opt out of their plans, increasing the average risk of the pool. Insurers raise prices to offset that increased risk and the cycle begins again.” The “loop,” then, is a series of steps that form a continuous cycle. The “negative” part has to do with the continually increasing risks and costs: the risk rises when healthier consumers drop out, leading to higher costs, leading to more consumer drop-outs, and so on.

(A) While it is true that the decisions made by consumers and insurance companies do result in the negative feedback loop described in the passage, the parties involved are not “intentionally” creating a negative feedback loop of rising risks and costs. The negative feedback loop is a consequence of decisions made for other reasons.

(B) The passage does not indicate that consensus-building could solve any problem; indeed, the passage does not discuss how this negative feedback loop might be alleviated at all.

(C) The first sentence does say that this negative feedback loop “may [make] insurance prohibitively expensive” but it does not say that insurance definitely will become unaffordable; the only thing we know for sure is that the costs will rise. Further, this choice refers to the affected groups, plural; the insurance companies will still participate, and even the healthier consumers may still be able to afford to participate (but choose not to do so).

(D) The insurance companies do make decisions based upon business interests, but the concept of “employee interests” is not applicable to the negative feedback loop. The negative feedback loop, in this example, describes those who are buying individual insurance, not those who receive insurance through an employer.

(E) CORRECT. The second and third sentences describe a series of reasonable decisions made by each party (healthier consumers opting out to save money, insurers raising premiums because of the increased risk), but the collective set of decisions results in a worsening situation as the cycle continues.


3. The passage states which of the following about the cost of health care?

(A) It is generally higher for people with poor health.
(B) It is generally higher for full-time workers.
(C) It is not fairly priced in the current market.
(D) It has been rising in recent years.
(E) The lower the average risk of the employee pool, the less it costs.



4. The primary purpose of the passage is to

(A) advocate for change on behalf of a particular group
(B) make and support a claim
(C) introduce recently discovered information
(D) challenge a widely accepted explanation
(E) argue that a situation is morally wrong

The first sentence begins with the claim that “adverse selection may be making health insurance prohibitively expensive for the unemployed.” The rest of the first half of the paragraph explains how adverse selection works for those buying individual health insurance. The second half explains why those who are employed are not subject to this phenomenon.

(A) The author of the passage does not advocate on behalf of any particular group, but rather explains a situation faced by both consumers and insurance companies.

(B) CORRECT. The first sentence makes a particular claim. The rest of the paragraph is designed to support that claim.

(C) The information presented is not described as “recently discovered.”

(D) The passage does not discuss a widely accepted explanation, nor does the passage challenge any particular idea or explanation.

(E) The passage does not assert that the situation discussed is “morally wrong"; rather, it just explains how the situation occurs.


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Originally posted by Gnpth on 01 Apr 2015, 05:21.
Last edited by hazelnut on 13 May 2018, 00:55, edited 1 time in total.
Added Question 4.
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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 02 Apr 2015, 07:31
Thanks for the passage. Answered all correctly. Took me 5 minutes.
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New post 24 Apr 2015, 05:13
easy passage. Took 6:45 .
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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 05 Aug 2015, 06:06
I have a question concerning q. number two:

Why is "E. a series of understandable decisions continually escalates in a damaging manner" correct? Where does it say that the decisions are "understandable"?
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New post 05 Aug 2015, 10:11
can anyone explain Q 2 & 3 ?? I got both of them wrong. i mean why not Option A for Q2???
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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 05 Aug 2015, 22:44
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Option A uses the word "intentionally" which is not the case.
There is compulsion on Insurance companies to raise the insurance rates ( read below line)
" Insurers raise prices to offset that increased risk and the cycle begins again"
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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 06 Aug 2015, 05:26
can some one tell the answers of above questions
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New post 06 Aug 2015, 05:27
can some one tell the answers of above questions
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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 10 Aug 2015, 12:19
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Can anyone explain question 1

1. The passage suggests that which of the following would be most likely to reduce the occurrence of adverse selection in the health insurance industry?

A. Higher insurance rates for employers with older-than-average employees
B. Protection from lawsuits alleging discrimination against consumers in poor health
C. Legislation requiring the healthiest consumers enrolled in a given insurance plan to pay premiums comparable to those of the unhealthiest members
D. Individual insurance rates that are affordable enough to persuade healthy consumers to purchase health insurance
E. Legislation requiring all employers to provide health insurance to their employees

I marked E because if all employers provide health insurance then as per effects given in 2nd para and 1st para last line adverse selection will reduce.

I eliminated D because no where mentioned whether current prices are affordable enough or not ? The issue is that health insurance is not cost effective, that's why they opt out. Its not that the insurance is not affordable
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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 09 Dec 2015, 16:03
Thanks for the passage & questions. Definitely a good passage to breakdown.
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New post 04 Jan 2016, 20:42
Can some one please explain the answer to question 3?
Why is it not E.

The passage clearly states at multiple places that when the average risk increases, the cost increases.
Cant we assume by this fact that if the average risk decreases, the cost decreases?

Any pointers would be helpful.
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New post 04 Jan 2016, 20:49
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noTh1ng wrote:
I have a question concerning q. number two:

Why is "E. a series of understandable decisions continually escalates in a damaging manner" correct? Where does it say that the decisions are "understandable"?


I got this right and will try to explain it to you.
The negative feedback loop causes
a) the healthy customers to opt out.
b) insurance companies to increase cost
c) unhealthy , unemployed to suffer the damage.

Now, all these decisions are logical and understandable because the first step causes the second and second causes the third. The logic for this is given in the first paragraph.
The less than average costs for health care causes the healthy customers to opt out. It seems logical, isint it? :)

So, that's why these decisions add up to create a negative loop.

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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 04 Jan 2016, 20:51
PUNEETSCHDV wrote:
Can anyone explain question 1

1. The passage suggests that which of the following would be most likely to reduce the occurrence of adverse selection in the health insurance industry?

A. Higher insurance rates for employers with older-than-average employees
B. Protection from lawsuits alleging discrimination against consumers in poor health
C. Legislation requiring the healthiest consumers enrolled in a given insurance plan to pay premiums comparable to those of the unhealthiest members
D. Individual insurance rates that are affordable enough to persuade healthy consumers to purchase health insurance
E. Legislation requiring all employers to provide health insurance to their employees

I marked E because if all employers provide health insurance then as per effects given in 2nd para and 1st para last line adverse selection will reduce.

I eliminated D because no where mentioned whether current prices are affordable enough or not ? The issue is that health insurance is not cost effective, that's why they opt out. Its not that the insurance is not affordable


I got this right and will try to explain it to you.
The negative feedback loop causes
a) the healthy customers to opt out.
b) insurance companies to increase cost
c) unhealthy , unemployed to suffer the damage.

Now, lets say that the individual insurance rates are affordable. This will let the healthy consumers to pay for insurance and hence not opt out. So this loop wont start.

Hence, D is the correct choice.
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New post 04 Jan 2016, 22:04
neha, the passage doesn't state anything about the cost of employee pooled insurance other than that is helps bundle the risk, pooling high and low risk patients. It would take outside knowledge to know if employee pooled insurance comes at different prices vs one price or to know if it is based on the average employee age, tenure, industry etc.
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New post 09 Jan 2016, 19:47
1. The passage suggests that which of the following would be most likely to reduce the occurrence of adverse selection in the health insurance industry?

D. Individual insurance rates that are affordable enough to persuade healthy consumers to purchase health insurance
E. Legislation requiring all employers to provide health insurance to their employees

In this question, we can remove choice A, B and C easily. As the passage mentioned that "Health insurance companies typically establish a standard rate, based on the average risk of the group, for a particular segment of the population." This sentence showed how the health insurance companies can handle their problems, including 3 parts "1) poorer health are more willing to pay. 2) Healthier consumers however, often forgo such insurance. and 3) Among employers that offer health insurance, most obligate all employees"

You can see that Choice E is just one of 3 parts of the standard rate's purpose.
So choice D is correct since it covers all parts.
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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 15 Sep 2017, 18:47
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Gnpth wrote:


Adverse selection may be making health insurance prohibitively expensive for the unemployed. In this negative feedback loop, rising insurance premiums cause the healthiest consumers to opt out of their plans, increasing the average risk of the pool. Insurers raise prices to offset that increased risk and the cycle begins again. Health insurance companies typically establish a standard rate, based on the average risk of the group, for a particular segment of the population. Among those who purchase individual insurance, consumers in poorer health are more willing to pay for such insurance because they have higher-than-average health care costs. Healthier consumers however, often forgo such insurance, reasoning that it is cheaper to pay directly for their lower-than-average health care costs. Among employers that offer health insurance, most obligate all employees, healthy or otherwise, to enroll in the employer’s group plan. Further, because a minimum health level is often required in order to fulfill job requirements, employer group insurance plans effectively pre-screen for a minimum level of health. Insurance companies can typically charge a lower premium to these groups, based on the lower average risk of the entire employee pool, without worrying that healthy employees will opt out of the plan as individual consumers might.
3. The passage states which of the following about the cost of health care?

A. It is generally higher for people with poor health.
B. It is generally higher for full-time workers.
C. It is not fairly priced in the current market.
D. It has been rising in recent years.
E. The lower the average risk of the employee pool, the less it costs.




The majority of the passage concerns health insurance costs, which are distinct from the costs of the underlying health care itself. The author discusses the cost of health care only in the middle of the paragraph, explaining that healthy consumers incur lower-than-average health care costs, while consumers in poor health incur higher-than-average costs.

(A) CORRECT. The fifth sentence of the passage states that “consumers in poorer health…have higher-than-average health care costs.

(B) The passage does not compare the cost of health care for full-time workers to that for any other segment of the population. The only distinction made in the passage is between the employed and the unemployed, and then only in terms of health insurance costs.

(C) Although the passage does discuss the potentially high cost of health care insurance for the unemployed, the passage does not assert that the cost of health care itself is unfair.

(D) The passage does not discuss any changes in health care costs over time; the only rising costs discussed have to do with insurance.

(E) Though we are specifically told that insurance premiums are lower if the average risk of the employee pool is lower, we are told nothing about the cost of health care.
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Re: Adverse selection may be making health insurance prohibitively expensi [#permalink]

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New post 12 Apr 2018, 23:58
Hi hazel....In Q3, it says poor are willing to pay more but no where written "It is generally higher for people with poor health."Kindly explain.
Re: Adverse selection may be making health insurance prohibitively expensi   [#permalink] 12 Apr 2018, 23:58
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