Self‐Insurance With Genetic Testing Tools

• DOI: http://doi.org/10.1111/jori.12085
• Published date: 01 March 2017
• Author: David Crainich
• Date: 01 March 2017

©2015 The Journal of Risk and Insurance. Vol.84, No. 1, 73–94 (2017).

DOI: 10.1111/jori.12085

Self-Insurance With Genetic Testing Tools

David Crainich

Abstract

The development of genetic testing creates opportunities to better target dis-

ease prevention actions. In this article, we determine how the genetic infor-

mation modifies self-insurance efforts in different health insurance market

equilibria with adverse selection. We show that a regulation prohibiting in-

surers from using genetic information for rate-making purposes: (1) cancels

the benefits of genetic testing when pooling equilibria occur and (2) does not

prevent the exploitation of the benefits derived from genetic testing when

separating equilibria (both of the Rothschild–Stiglitz or of the Miyazaki–

Spence type) prevail in insurance markets.

Introduction

The identification through genetic testing of gene mutations increasing the suscepti-

bility to some diseases raises several economic issues. One of the most controversial

is related to the use of genetic information in health insurance markets (for a good

overview of the issue, see Hoy and Ruse, 2005). By providing individuals with better

information about their probability of developing a disease, predisposition tests could

increase inefficiencies due to adverse selection if insurance companies cannot use this

information when offering contracts. If the genetic information is disclosed, there is

on the other hand concern that high-risk individuals may be penalized for inherited

characteristics since they potentially could not afford health insurance. Health

policies yet adhere to the second view. As far as health insurance is concerned,1the

policies adopted in European countries follow the recommendation of the Council

of Europe according to which “insurers should not have the right to require genetic

testing or to enquire about results of previously performed tests, as a precondition for

the conclusion or modification of an insurance contract” (Recommendation R92(3)

on genetic testing and screening for healthcare purpose). The same trend prevails

in the United States where the Genetic Information Nondiscrimination Act of 2008

“prohibits group health plans and health insurance issuers (i.e., insurance companies

or health maintenance organizations [HMOs]) in the group market from using genetic

information to adjust premium or contribution amounts for the group covered under

David Crainich is at the CNRS (LEM UMR 9221) and at Iéseg School of Management, Lille,

France. Crainich can be contacted via e-mail: d.crainich@ieseg.fr.

1The use of genetic test results in life and disability insurance is more common and varies across

countries.

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74 The Journal of Risk and Insurance

the plan. ...In the individual market, health insurance issuers are prohibited from

using genetic information to determine individual eligibility or premium rates.”

Much of the ongoing public debate is presented as a conflict between adverse selec-

tion and genetic discrimination. Discussions tend to omit that genetic testing also has

the potential to improve welfare through targeted prevention efforts resulting from

better morbidity information. In a seminal contribution on the relationship between

two forms of prevention and insurance, Ehrlich and Becker (1972) indicate that opti-

mal self-protection actions (i.e., actions reducing the probability of a loss) and optimal

self-insurance actions (i.e., actions reducing the size of a loss) depend on the baseline

probability of the loss and on insurance coverage. This implies that a better alloca-

tion of resources can be achieved if individuals make prevention decisions based on

their own probabilities of disease and not on the prevalence of the disease. This also

suggests that the information regime in the health insurance market—insofar as it

influences insurance coverage—may distort prevention decisions from their optimal

levels.

Few economic analyses have been dedicated to insurance and prevention decisions

in relation to the development of genetic testing. Hoy (1989) analyzes the welfare

implication of improvements in information but assumes that the risk class informa-

tion is provided to insurers and policyholders, thus ignoring adverse selection issues.

Doherty and Posey (1998) establish that information on the mortality probability has

a positive social value if three conditions are met: (1) the mortality probability can be

reduced through self-protection actions, (2) some individuals are initially informed

about their own probability of death whereas some others are not, and (3) consumers’

information status and test results are not known by life insurance companies. In a

model where prevention actions reduce the probability of disease for high-risk indi-

viduals, Hoel and Iversen (2002) examine two regulatory issues: the insurers’ access to

the policyholders’ genetic information and the mix of compulsory and private health

insurance. They highlight economic inefficiencies related to the use of genetic testing,

namely, that tests may be taken when they are socially inefficient if individuals are

mainly covered through voluntary insurance while tests may not be taken even if they

are socially beneficial within compulsory health insurance systems. In a closely related

work, Filipova and Hoy (2014) indicate the conditions under which the opposite con-

clusion is reached: they show that private insurance schemes can create disincentives

to obtain socially valuable genetic information whereas public insurance regimes can

provide incentives to take a test that is welfare deteriorating. Barigozzi and Henriet

(2011) analyze individuals’ decision to perform a genetic test that enables informed

self-insurance decisions. They then compare four different forms of regulation of the

genetic information in health insurance markets, from the strict prohibition to incor-

porate test results when offering contracts to the laissez-faire regime.They find out that

the disclosure duty approach—under which insurers are allowed to use the results

of existing tests but not to require additional tests—maximizes social welfare. Under

this information regime, they show that tests are performed only when their net social

benefit is positive. Finally, Bardey and De Donder (2013) determine in a recent work

the conditions (related to the cost and the efficiency of self-protection actions) such

that moral hazard raises the value of the genetic information.