Risk Segmentation: Goal or Problem?

This paper traces the evolution of economists' views about risk segmentation in health insurance markets. Originally seen as a desirable goal, risk segmentation has come to be viewed as leading to abnormal profits, wasted resources, and inefficient limitations on coverage and services. We suggest that risk segmentation may be efficient if one takes an ex post view (i.e., after consumers' risks are known). From this perspective, managed care may be a much better method for achieving risk segmentation than limitations on coverage. The most serious objection to risk segmentation is the ex ante concern that it undermines long-term insurance contracts that would protect consumers against changes in lifetime risk.