GMAT Question of the Day: Daily via email | Daily via Instagram New to GMAT Club? Watch this Video

 It is currently 05 Apr 2020, 18:07

### GMAT Club Daily Prep

#### Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.

Customized
for You

we will pick new questions that match your level based on your Timer History

Track

every week, we’ll send you an estimated GMAT score based on your performance

Practice
Pays

we will pick new questions that match your level based on your Timer History

# Adverse selection may be making health insurance prohibitively expensi

Author Message
TAGS:

### Hide Tags

Current Student
Status: Chasing my MBB Dream!
Joined: 29 Aug 2012
Posts: 1097
Location: United States (DC)
WE: General Management (Aerospace and Defense)

### Show Tags

Updated on: 22 Aug 2019, 23:18
5
1
9
Question 1
00:00

based on 575 sessions

69% (02:41) correct 31% (02:33) wrong

### HideShow timer Statistics

Question 2
00:00

based on 636 sessions

51% (00:55) correct 49% (01:08) wrong

### HideShow timer Statistics

Question 3
00:00

based on 656 sessions

43% (00:56) correct 57% (00:53) wrong

### HideShow timer Statistics

Question 4
00:00

based on 355 sessions

54% (00:52) correct 46% (00:57) wrong

### HideShow timer Statistics

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.

_________________
Become a GMAT Club Premium member to unlock discounts

MBA, Class of 2020,

Originally posted by Gnpth on 01 Apr 2015, 04:21.
Last edited by SajjadAhmad on 22 Aug 2019, 23:18, edited 2 times in total.
Updated - Complete topic (267).
Intern
Joined: 12 Nov 2015
Posts: 42

### Show Tags

04 Jan 2016, 19:49
6
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.

Consider kudos if this helps.!
##### General Discussion
Manager
Joined: 31 Aug 2011
Posts: 136

### Show Tags

10 Aug 2015, 11:19
2
1
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
Intern
Joined: 12 Nov 2015
Posts: 42

### Show Tags

04 Jan 2016, 19:42
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?

Intern
Joined: 12 Nov 2015
Posts: 42

### Show Tags

04 Jan 2016, 19:51
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.
Intern
Joined: 08 Dec 2015
Posts: 21

### Show Tags

04 Jan 2016, 21:04
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.
Intern
Joined: 01 Aug 2014
Posts: 36

### Show Tags

09 Jan 2016, 18:47
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.
Senior SC Moderator
Joined: 14 Nov 2016
Posts: 1342
Location: Malaysia

### Show Tags

15 Sep 2017, 17:47
2
1
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.
_________________
"Be challenged at EVERY MOMENT."

“Strength doesn’t come from what you can do. It comes from overcoming the things you once thought you couldn’t.”

"Each stage of the journey is crucial to attaining new heights of knowledge."

Senior Manager
Joined: 03 Mar 2017
Posts: 363

### Show Tags

24 Jul 2018, 21:41
1
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

IMO D should be correct answer.
"Negative feedback loop" situation arises when there is a difference in the insurance plan premium between the healthy and the unhealthy members.
This is because the company raises the premium in order to counter the loss arising from the exit of the healthy members from the plan.

Really appreciate if someone can help as to why E is correct.

Skywalker18 gmatexam439 abhimahna Gnpth mikemcgarry

hazelnut
_________________
--------------------------------------------------------------------------------------------------------------------------
All the Gods, All the Heavens, and All the Hells lie within you.
Intern
Joined: 28 May 2017
Posts: 20
Location: India
Concentration: Finance, Marketing
GPA: 3.87
WE: Web Development (Mutual Funds and Brokerage)

### Show Tags

27 Jul 2018, 00:00
4
warrior1991 wrote:
visheshsahni wrote:
All correct!! The passage indeed tests how carefully you read Q3 rather than just selecting the answer.

Could you help me on Question #2

Sent from my iPhone using GMAT Club Forum mobile app

It is best to tackle Q2 by negating the options.
A - those affected by the situation are clearly people with poor health. The situation is created by unconscious actions of people who have good health. So wrong
B - opposing party is rather strong term. Both parties are involved. But no one is against anyone. Even though situation makes it look like so but this is too strong option.
C - the affected group is still participating irrespective of increasing cost.
D - this option does focus on intentions of firms. But employee interests are something which can’t cause negative feedback loop. We don’t know how many employees are of good health.
E - understandable decisions like increasing the pool cost. Or healthy people withdrawing themselves from buying policies. As these things keep on increasing. Negative feedback loop feeds itself on and on.

Please ignore spelling mistakes if any! Wrote this on phone’s browser.

warrior1991
Director
Joined: 24 Oct 2016
Posts: 622
GMAT 1: 670 Q46 V36
GMAT 2: 690 Q47 V38

### Show Tags

20 Sep 2018, 15:14
1

Official Solution (Credit: Manhattan Prep)

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

those affected by that situation intentionally created the situation in the first place

opposing parties cannot come to consensus or solve a problem

the affected groups can no longer afford to participate in that situation

companies make decisions based upon business interests as opposed to employee interests

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.
Director
Joined: 24 Oct 2016
Posts: 622
GMAT 1: 670 Q46 V36
GMAT 2: 690 Q47 V38

### Show Tags

20 Sep 2018, 15:14
1

Official Solution (Credit: Manhattan Prep)

The primary purpose of the passage is to

advocate for change on behalf of a particular group

make and support a claim

introduce recently discovered information

challenge a widely accepted explanation

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.
Director
Joined: 24 Oct 2016
Posts: 622
GMAT 1: 670 Q46 V36
GMAT 2: 690 Q47 V38

### Show Tags

20 Sep 2018, 15:15

Official Solution (Credit: Manhattan Prep)

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

It is generally higher for people with poor health.

It is generally higher for full-time workers.

It is not fairly priced in the current market.

It has been rising in recent years.

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.
Intern
Status: Aim for the moon. If you miss, you may hit a star.
Joined: 21 Jan 2020
Posts: 32
Location: United States (IL)
Schools: Kellogg PT '23, Booth
GMAT 1: 710 Q50 V37
GPA: 3.68
WE: Supply Chain Management (Health Care)

### Show Tags

19 Mar 2020, 13:50
For question 4, please note in answer E, the cost of health care <> the cost of insurance. The former refers to people's spending on health care resources (e.g. purchase medicines, pay for surgery...)
Re: Adverse selection may be making health insurance prohibitively expensi   [#permalink] 19 Mar 2020, 13:50
Display posts from previous: Sort by