RMI 3501 Lecture Notes - Lecture 1: Essential Health Benefits, Health Insurance Portability And Accountability Act, De Minimis

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Risk classification in the voluntary health insurance market. Risk selection and risk classification, commonly known as underwriting, play an important role in most private insurance systems, but are often not well understood outside of the insurance industry. Information on a specific individual"s risk characteristics, such as health status, is not used to determine eligibility for most employer-sponsored and government-sponsored health insurance programs. However, such information is often used in the voluntary, individual health insurance. Risk classification helps maintain the financial soundness of the voluntary, individual health insurance market. If individuals purchase insurance based on adverse health information or other risk characteristics that are unknown to or not considered by the insurer, adverse selection results. Adverse selection means that otherwise similar people at lower risk for high health spending subsidize those at greater risk. However, there is a limit to the additional premium any given consumer is willing to pay for this guarantee.

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