Genetic Testing and the Dismal Future of the Health Insurance Industry

Genetic Testing and the Dismal Future of the Health Insurance Industry^[8]

Genetic testing might someday destroy the market for health insurance because testing holds the promise of determining which diseases people will get. The health insurance industry, however, depends upon blissful ignorance and might be decimated by genetic testing.

Imagine there was some magical test that could determine who would win the next Buffalo Bills football game. The mere existence of this test would probably prevent people from betting on the Bills. Everyone who didn’t run this test would fear making a bet because they would suspect that the person on the other side of their bet did use the test.

People buy health insurance because they don’t know whether they will get sick. For example, assume that 1 percent of 35-year-olds will incur significant health care expenses over the next year. It’s worthwhile for almost every 35-year-old to get health insurance. Those who don’t get sick will pay a little to the insurance company, which will give most of these funds to those who did need medical coverage. The insurance company effectively transfers money from those who turn out to be healthy to those who end up sick.

Now imagine that there was some genetic test that could determine whether you would get sick the next year. If you took this test, you would only buy insurance if the test indicated that you would get sick. Of course, if the only people who buy insurance were those who will get sick, then the insurance companies would go bankrupt.

If there were genetic tests that could determine when someone would get, say, cancer or heart disease, then the insurance companies would be reluctant to sell coverage to anyone they had not tested. These companies would fear that the people who wanted coverage had been tested themselves and knew they would get sick. The genetic tests would increase the adverse selection problems inherent in the insurance industry because the people buying insurance would have even more private information about themselves.

If the insurance companies tested applicants, it would still not solve this genetic problem. The insurance companies would be unwilling to sell insurance to someone whose genetic test reveals will get cancer next year unless this person pays the full cost of cancer treatment. This person would thus not buy insurance; he would be paying for cancer treatment.

True, with genetic testing one could still insure against accidents. Also, a genetic condition might mean one has, say, only a 50 percent chance of getting some disease. You could still insure against this 50 percent risk. To the extent that genetics determine your future health expense needs, however, genetic testing will destroy the health insurance industry.

^[8]See Dismal.com (August 17, 2000).