Government as the Ultimate Risk Manager

When it comes to insurance, it is very important to "pool" risks so that financial burdens are distributed across many people. Health insurance is a great example. Each policyholder of the insured group pays premiums that the insurance company then uses to cover the cost of those in the group who become sick or injured. While most people remain relatively healthy, large groups of people have more predictable medical expenses and the chance that actual costs exceed expected costs is minimized. 

Adverse selection, which occurs when individuals know more than their insurers about their own risk levels, is one of the primary sources of risk-related failures in the private sector. People that have terminal diseases are more likely to buy health insurance, so long as their insurers are unaware and fail to raise premiums. On the other hand, people who are healthy are less likely to purchase health insurance. This skews the insurance pool toward ever-higher levels of risk, which can distort or destroy insurance markets. 

Elisabeth and Mark Horst, artists in Albuquerque who earn $24,000 a year between them, qualified for a zero-premium plan.

In regards to adverse selection, David A. Moss states, "Compulsory insurance is especially effective because it prevents anyone - even the lowest-risk individuals - from opting out of the pool" (50). As health insurance coverage expands with the Affordable Care Act (ACA), the pool also needs to expand in order to balance out the large number of sick people who will be entering the market. This is why the individual mandate is so important.  

Do you think it is the government's role to mitigate the expenses associated with health problems? Or do you think that the private sector is adequate? What are your personal views on the individual mandate? After reading this article, which explains that many people will be obtaining free health insurance policies due to the ACA, do you still disagree with the individual mandate?