Greetings. We are walking through different variations of information problems that can lead to market failure. You've seen this slide many times because I've been using it to motivate this idea that market failure in this particular case is not because it's a monopoly or something like that. It's because there's information issues that make it hard for this market to work out. This last one I want to talk about is something called adverse selection. This is another form of information asymmetry. Adverse selection says, that essentially the information asymmetry is meaning that you are getting the adverse selection means that the people who are selecting your product are not the people that are going to make things work for you. The easiest way to think about this is for us to consider the market for health insurance. Imagine that I'm going to go out and get some, I'm going to sell some health insurance to this group of people. Suppose there's a 100 people in this pool that I want to sell health insurance to. I'm going to sell health insurance to this group for a common rate, the average rate. In other words, I'm going to get a rate that everybody is going to pay the same rate. As a result of everybody paying the same rate, statistically, I will have, because I haven't actuary that's helped me figure this out. Statistically, if everybody pays this rate to me, I'll have enough to cover all the expected healthcare issues that happen over the course of the year for that group of a 100 people. That's fine. So I pick one rate and everybody gets to pay it. Now the problem is that when you think about this market, and I'm going to do one of my thought bubbles. Earlier I introduced you, I didn't introduce you, I just reminded you of something called the central limit theorem. The central limit theorem says, that once you've got over a debatable number, 35, 40 people, that this distribution of people is going to look like a bell curve. In this case, this distribution would be on health. Some people have really bad health. They're down here. Some people have really good health. Think about that pool of a 100 people that I'm selling insurance to. If I quote one price to that pool, then that average price is the price that has to be enough to cover everybody's costs on average. Now it turns out there's a group of people with that pool, the top 10 people who say, "Hey, wait a minute, I'm a healthy strapping person. I don't smoke, I don't drink, I don't run around in fast cars. Why should I be paying that average rate that everybody else is paying?" Because I know there's some people who are like, Brock is overweight and he's old and all things are wrong with his lifestyle changes come on. I'm getting out here. Those top 10 people pull out. Now when those top 10 people pull out, who's left? Ninety people, but those 90 people are what? Sicker on average to what they were when they had those 10 healthiest people in there. When these top 10 people go away, the people who are left are on average sicker. That means that the health insurance company has to raise the rate, if the rate is going to be axial. If I don't raise the rate, what's going to happen to my health insurance company? It's going to go broke, because I was trying, I was pricing it. On average, I would just make enough money to stay in business. But unfortunately now in the new world, I'm going to have to erase that, because the average sickness, the average claims in this group are going to be higher than they used to be, because those 10 healthy people are not there. But once soon as I raised the rate, what happens? Well, there's a few more healthy people who are out here and say, "Well, I'm out too." The adverse selection problem is that as you tried to raise your rate to make it average for that group, somebody in that group, in this health insurance group is now going to realize, it's just not worth it for me to do that, and so they're going to pull out. That's collapses the market. The adverse selection issue here, which is, as I said, it's a form of information asymmetry. I just don't know enough about who the healthy ones and who the non-healthy ones are. I quote this average rate, but I do know that people who will know that they're healthy and they're going to be born on this. I haven't been seeing a doctor in three years, why should I be paying all this money? This is a famous problem that comes from the, if you think about, what we know is what we call Obamacare is called the Affordable Care Act. The Affordable Care Act has a very important key is something that we have no pre-existing conditions. Everybody pays the same insurance, same premium for the same basket of coverage. Not necessarily the same year. If you're an affordable care and I'm and affordable care, we may have different premiums because I may have picked a different type of plan, one that covers a little more, one that allows me to go out of my local area, if I really want to go to Mayo for some things. Some packages don't have that. But when for the particular package you choose, everybody who chooses that package gets the same rate. The only way that works is when you have this issue of Obamacare calls the individual mandate. The individual mandate says, everybody has to have health care, everybody has to have health insurance. In Obamacare, the ACA said, the individual mandate, you have to do it, if you don't, you're going to pay a big penalty. Now, the opponents of Obamacare took that to the Supreme Court, back in June of 2012. The Supreme Court ruled that yes, the individual mandate was constitutional and it was a legal part of that offering, and so that maintained this rule. But from our point of view, the issue here is that if you want to charge one rate, no matter what the person's health issues are, you need to have some rule to keep people from just saying, I'm out. Because otherwise, the people who are 21 and 22 year-olds really healthy, they're just not going to pay the insurance. We see that in the data. Thanks.
