Directions: Read the given passage carefully and answer the questions as follows:
Passage
To remain financially sound, health insurance companies must charge higher rates to insure people considered a higher risk. Lacking complete information about individuals, insurers are forced to set a standard rate, based on the average risk of the group, for a particular segment of the population. Consumers in poor health are willing to pay for the insurance, knowing that it will cover their higher-than-average health-care costs. In contrast, healthy consumers often decide to forgo the insurance, reasoning that it is less expensive to pay out-of-pocket for their lower-than-average health-care costs. The result, called “adverse selection,” is that the riskier members of a group will comprise the group of insurance applicants, potentially leading to a market failure in which insurance companies cannot afford to offer insurance at any price.
Among people over age sixty-five, even the wealthy can have difficulty obtaining fairly priced medical insurance, simply because of their age. However, those who blame so-called insurance company greed and discrimination against the elderly are ignoring the reality of adverse selection. Younger people generally obtain health insurance through their employers’ group insurance plan. Employer’s plans obligate all employees to enroll in the plan and effectively pre-screen for general health, as a minimum health level is required to hold a job. Insurance companies can therefore charge a lower premium, based on the lower average risk of the employee pool, without worrying that healthy employees will opt out of the plan.
Consumers over sixty-five, typically not employed and thus seeking insurance individually, are necessarily more vulnerable to market failure stemming from adverse selection.
Question for Practice Test: Reading Comprehension - 19
Try yourself:The author refers to "greed and discrimination" in the second paragraph of the passage in order to
Explanation
The author believes that “adverse selection” is the reason that the elderly can have difficulty obtaining fairly priced insurance. Other people believe that “greed and discrimination” are the reasons. The author disputes that explanation by stating that such people are “ignoring the reality of adverse selection.”
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Question for Practice Test: Reading Comprehension - 19
Try yourself:Which of the following best describes the function of the first paragraph within the passage as a whole?
Explanation
The first paragraph explains the problem of adverse selection, describing how high-risk individuals are more likely to purchase insurance, while healthier individuals opt out. This imbalance creates a risk for insurance companies, potentially leading to market failure.
The second paragraph refers to this problem by explaining how employer-based insurance mitigates adverse selection and why people over sixty-five are more vulnerable to this issue.
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Question for Practice Test: Reading Comprehension - 19
Try yourself:It can be inferred from the passage that unemployed people
Explanation
The passage implies that having a job is a sign of health, since people in poor health would have trouble performing job duties. Therefore, since the group of unemployed people includes those too sick to work, it is not as healthy, on average, as the group of employed people.
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Question for Practice Test: Reading Comprehension - 19
Try yourself:The primary purpose of the passage is to
Explanation
The first paragraph defines adverse selection and explains that the situation is considered a market failure. The second paragraph explains how adverse selection affects one segment of the population.
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Question for Practice Test: Reading Comprehension - 19
Try yourself:The passage states which of the following about the cost of health-care?
Explanation
The first paragraph of the passage states that “consumers in poor health…[know] that [insurance] will cover their higher-than-average health-care costs.”
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