Tuesday, 29 August 2017

Genetic tests, life and health insurance

Is there an unintended consequence of getting a genetic test? Increasingly, people are undergoing genetic tests to identify whether they are susceptible to various illnesses such as cancer. But, as Jane Tiller and Paul Lacaze (both Monash University) wrote in The Conversation earlier this week, there's a downside to this:
Australian insurers can increase premiums, exclude insurance cover for certain conditions such as cancer, or refuse insurance cover altogether purely based on your genetic test results.
Genetic tests look at DNA, the material that contains the instructions for our bodies to grow, develop and function. Some DNA changes cause diseases such as cystic fibrosis or Huntington’s Disease, while others can make us more susceptible to conditions such as cancer. Doctors can refer patients to a genetics service if they consider such tests might be of value due to family or personal history.
Although cases of genetic discrimination are difficult to identify, they have been documented in Australia. In one case, a woman with a BRCA gene, which is known to increase breast cancer risk, elected to have both breasts removed to reduce her risk. However, the consequent, significant risk reduction wasn’t taken into account by the insurer. When she applied for death and critical illness cover, the insurer excluded any cancer cover and imposed a 50% premium loading for death cover.
As I noted in yesterday's post about car insurance, insurers base premiums on:
  1. The risk of the insured person making a claim (higher risk groups pay higher premiums than lower risk groups); and
  2. The cost of the claims to the insurer (those who would make more expensive claims pay higher premiums).
Note that this applies to both health insurance, and life insurance. Tiller and Lacaze argue that:
As genetic testing becomes more widespread in our society and offers increased potential to help manage patient risk, we must find a way of regulating the insurance implications.
The Australian government must take action towards an immediate ban (moratorium) on the use of genetic test results in insurance, until adequate long-term regulation is in place.
However, before we jump to the same conclusion, let's think through the implications, because this situation is different from yesterday's example of car insurance. In yesterday's example, safe cars cost more for insurance companies because the cost of claims to the insurer were higher. This information (the cost of claims) is public information - the insurers already know this information. In the case of the results of a genetic test that a person has undertaken privately, that is private information - it is information that the insured person knows, but the insurer does not. There is an information asymmetry.

While not all information asymmetries are problematic, sometimes they can lead to adverse selection and market failure, as is possible in this case. An adverse selection problem arises because the uninformed party (the insurer) cannot tell those with 'good' attributes (low-risk people) from those with 'bad' attributes (high-risk people). Now of course the insurer knows some details about each person, but two people who look similar in terms of the observable characteristics (age, gender, occupation, smoker/non-smoker, etc.) may differ in terms of their genetic risk. Genetic risk is the private information here. To minimise the risk to themselves of engaging in an unfavourable market transaction, it makes sense for the insurer to assume that everyone is high-genetic-risk. This leads to a pooling equilibrium - low-genetic-risk people are grouped together with the high-genetic-risk people and pay the same premium, because they can't easily differentiate themselves. This creates a problem if it causes the market to fail.

Will the market fail in this case? If a person had a genetic test, and the results said they were low-genetic-risk, but the insurer wasn't allowed to take this into account, then the insurer has to charge that person the same premium as a high-genetic-risk person (with the same other characteristics). This is likely to be a bad deal for the low-genetic-risk person, so they may opt out of the market. This leaves only high-genetic-risk people in the insurance market (plus those who haven't had a genetic test). It is easy to see that the market might fail here. High-genetic-risk people are less profitable to insure, and the insurance companies might opt out of providing cover at all (for similar explanations for why the market will fail, see this earlier post about health insurance, or this post on adverse selection in life insurance).

But what about if the low-genetic-risk person reveals the private information to the insurer? When the informed party reveals their private information in a credible way, we refer to this as signalling. This would be one way of solving the adverse selection problem. If low-genetic-risk people started revealing their test results, it wouldn't matter if high-genetic-risk people kept their results hidden, since the insurers could infer that anyone withholding their results would be more likely to be high-genetic-risk. Unless, as Tiller and Lacaze propose, insurers are banned from using genetic test results.

Is there a better option? You might be concerned, as Tiller and Lacaze are, about the unfairness of it all. We have no control over our own genetics (at least, not yet), so it seems unfair that some people would have to pay higher premiums as a result of something they have no control over. But banning the use of genetic tests potentially makes a bad problem worse, because it may mean that everyone pays higher insurance premiums, not just those at high-genetic-risk. This is like a tax on those at lower-genetic-risk who get insurance. A better option, if the government is concerned about reducing unfairness in this market, would be to allow the genetic test results to be used for setting premiums, but subsidising the premiums of those who are at high-genetic-risk. Subsidies have their own problems of course, but at least the cost would be spread over all taxpayers, rather than concentrated on the small number of lower-genetic-risk insured people.

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