Adverse Selection may be Making Health Insurance Prohibitively Expensive GMAT Reading Comprehension

Reading Passage Question

Adverse selection may be making health insurance prohibitively expensive for the unemployed. In this negative feedback loop, rising insurance premiums cause the healthiest consumers to opt out of their plans, increasing the average risk of the pool. Insurers raise prices to offset that increased risk and the cycle begins again. Health insurance companies typically establish a standard rate, based on the average risk of the group, for a particular segment of the population. Among those who purchase individual insurance, consumers in poorer health are more willing to pay for such insurance because they have higher-than-average health care costs. Healthier consumers however, often forgo such insurance, reasoning that it is cheaper to pay directly for their lower-than-average health care costs. Among employers that offer health insurance, most obligate all employees, healthy or otherwise, to enroll in the employer’s group plan. Further, because a minimum health level is often required in order to fulfill job requirements, employer group insurance plans effectively pre-screen for a minimum level of health. Insurance companies can typically charge a lower premium to these groups, based on the lower average risk of the entire employee pool, without worrying that healthy employees will opt out of the plan as individual consumers might.

“Adverse selection may be making health insurance prohibitively expensive GMAT Reading Comprehension” is a sample text for the exam GMAT.This GMAT Reading Comprehension consists of 3 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solutions and Explanations

1. The passage suggests that which of the following would be most likely to reduce the occurrence of adverse selection in the health insurance industry?

(A) Higher insurance rates for employers with older-than-average employees
(B) Protection from lawsuits alleging discrimination against consumers in poor health
(C) Legislation requiring the healthiest consumers enrolled in a given insurance plan to pay premiums comparable to those of the unhealthiest members
(D) Individual insurance rates that are affordable enough to persuade healthy consumers to purchase health insurance
(E) Legislation requiring all employers to provide health insurance to their employees

2. The “negative feedback loop” mentioned in the second sentence can best be described as a situation in which

(A) those affected by that situation intentionally created the situation in the first place
(B) opposing parties cannot come to consensus or solve a problem
(C) the affected groups can no longer afford to participate in that situation
(D) companies make decisions based upon business interests as opposed to employee interests
(E) a series of understandable decisions continually escalates in a damaging manner

3. The passage states which of the following about the cost of health care?

(A) It is generally higher for people with poor health.
(B) It is generally higher for full-time workers.
(C) It is not fairly priced in the current market.
(D) It has been rising in recent years.
(E) The lower the average risk of the employee pool, the less it costs.

4. The primary purpose of the passage is to

(A) advocate for change on behalf of a particular group
(B) make and support a claim
(C) introduce recently discovered information
(D) challenge a widely accepted explanation
(E) argue that a situation is morally wrong

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