Health Insurance, Genetic Testing and Adverse Selection

The implications of genetic testing information availability for society, medicine, employment, and individual privacy rights have generated much political debate, legislation and academic research. Part of this debate centres on the ethical and economic considerations resultant from this expanded knowledge, particularly for insurance practices. Within insurance economics, the possibility of adverse selection has been debated and the potential for a ban on an insurer's use of genetic testing has been studied with respect to whether or not such a ban might actually result in insurance market failure due to this adverse selection. Studies have examined the issue using expected loss cost (actuarial or ‘fair’) pricing models, and have not considered either equilibrium (supply and demand) price setting as is present in markets, or the potentially swamping effect of background health care risks facing the insured, having nothing to do with any particular genetic mutation. Here we construct a supply and demand function with both high and low risk individuals in the presence of background health care cost risks, and derive an equilibrium price and market composition to determine whether, if genetic information is allowed for individuals, but this same information is not shared with insurers: (1) is market failure inevitable? (it is not if the background risk is sufficiently high relative to potential genetic risk costs); (2) will equilibrium prices result in all low risk insured exiting the market? (not in the presence of significant background risk); and (3) how much would prices increase and market sales decrease if insurers do not have the same genetic information as the insured? (prices will increase, but not necessarily very much in the presence of background risk, and not as much as that previously estimated in the insurance literature).