What is the effect of asymmetric information in insurance design related to CDHPs?

Asymmetric information occurs when one party in a transaction has more or better information than the other party. In the context of insurance design related to Consumer-Directed Health Plans (CDHPs), this situation significantly influences how individuals select their coverage.

Consumers possess varying levels of information regarding their own health risks while insurers may not have access to this specific health information. As a result, consumers with higher health risks are more likely to opt for plans that provide more extensive coverage, as they anticipate a greater need for medical care. Conversely, individuals who perceive themselves as healthier may prefer plans with lower premiums and higher deductibles, as they estimate their likelihood of utilizing health services to be lower.

This self-selection based on individual risk levels directly impacts the insurance pool. It creates a situation where individuals with higher expected healthcare costs enroll in more comprehensive plans, while those with lower costs choose less coverage. This dynamic can lead to higher premiums for the plans that attract higher-risk individuals and can drive healthier individuals away from comprehensive plans, potentially resulting in an imbalance in the risk pool.

Understanding this concept is crucial for designing effective insurance plans that account for the variation in consumer risk perception and ensure equitable pricing and coverage options for different segments of the population.