Since the introduction of the Impanian National Health Scheme, Impania

D, all the way:

can someone explain the option (D) in more simple terms.

Insurance makes it money by assuming that of the X amount of people that buy its service, only a small % will actually make a claim and cost the firm money.

In D)s case, it's stated that it's much more likely that people would buy the private insurance "only at times when they expect that they will need care of kinds not available in the National Health scheme."

Essentially, this mens the previously small % I spoke of earlier is going to way up. In order remain profitable, the insurer needs to increase price to compensate for the increased risk inherent with each new customer.

To illustrate with oversimplified numbers, say your insurance costs $10. If you make a valid claim you get $10,000

This is good for the insurer if they have a million customers each carrying a 0.01% risk of claiming because they dish out $1,000,000 in claims and take in $10,000,000.

But if that risk goes up to say, 2% ... That's 20,000 claimants which cost the company... erk, $200,000,000. How does the company not go bankrupt in three seconds? The raise the cost until their margins are met. Going from .01% to 2% is like a 200x increase in risk, so that $10 you were paying before is going to turn into $2000 to get things back to the way they used to be.

oh, wow, tough one. took some time to answer it. D is the clear winner. Looks like a "solve the paradox" kind of question.
it was expected the costs of private insurance to decrease, but in reality, it increased.
the only explanation that could be is that clients buy private insurance only when they actually need special kind of procedures not covered by the regular one. D says exactly this.

Since the introduction of the Impanian National Health Scheme, Impanians (or their private insurance companies) have had to pay only for the more unusual and sophisticated medical procedures. When the scheme was introduced, it was hoped that private insurance to pay for these procedures would be available at modest cost, since the insurers would no longer be paying for the bulk of health care costs, as they had done previously. Paradoxically, however, the cost of private health insurance did not decrease but has instead increased dramatically in the years since the scheme’s introduction.

Boil it down-The paradox is that now insurance companies don't have to pay for as many things as before, so they should in theory make their rates cheaper. But the opposite happens - even though they now pay for less, their rates have gone up!

Which one of the following, if true, does most to explain the apparently paradoxical outcome?

(A) The National Health scheme has greatly reduced the number of medical claims handled annually by Impania’s private insurers, enabling these firms to reduce overhead costs substantially.-- deepens paradox

(B) Before the National Health scheme was introduced, more than 80 percent of all Impanian medical costs were associated with procedures that are now covered by the scheme. -- deepens paradox

(C) Impanians who previously were unable to afford regular medical treatment now use the National Health scheme, but the number of Impanians with private health insurance has not increased. --doesn't seem too relevant. We don't care whether the number of people with private insurance has gone up or down. That doesn't (unless you bring in outside knowledge) explain why the price would change, so this is not the answer.

(D) Impanians now buy private medical insurance only at times when they expect that they will need care of kinds not available in the National Health scheme. --Now that normal people don't need private insurance for normal/average medical stuff, it's really only sick people or special people who need this special insurance. Therefore, all the ordinary people are going to drop out, and only people who need the procedures are going to get the insurance. So the insurance company may be paying out more relative to what it's taking in, since all the healthy people have gone to the National Health Plan.

(E) The proportion of total expenditures within Impania that is spent on health care has declined since the introduction of the National Health scheme. --doesn't go either way - we care about the insurance companies in particular, not about the general spending patterns in this mythical country.

Answer D

Although this question is a LSAT question, and the argument structure is quite complex, the question does sound like a gmat-like question.
Using POE, test takers can cross out A,B, and E.
C does not concern with why private insurances charge higher premiums.

Took me a while to see this. D) points out that the premiums for health insurance have gone up because the insurance companie's revenue has declined (people only buy insurance when needed).

I just did this LSAT, got 22/25 right and finished in less than 58 min. But, I got this qn wrong and I think this is the best question of the entire set.
You need to have very basic understanding of how insurance works. This is general knowledge in majority of the countries but not all. So, some folks miss it because they don't understand insurance as it is not common.

Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

Want to see all other topics I dig out? Follow me (click follow button on profile). You will receive a summary of all topics I bump in your profile area as well as via email.