Practice Test 3 Verbal

[xjenyan]

I'm having a difficult time understanding the explanation behind why answer choice C is incorrect in the following question in the verbal section of practice test 3:

Passage:
An economic phenomenon known as “adverse selection” may make health insurance prohibitively expensive for the unemployed. Because health insurance companies set insurance rates based on the average risk of the group, most employers’ group insurance plans obligate all employees, healthy or otherwise, to enroll in the plan. This keeps the average risk of the employee pool low by ensuring that healthy employees cannot opt out of the plan, leading to lower premiums. By contrast, the unemployed must buy their own insurance individually. Consumers in poor health are willing to pay for individual insurance because they have higher-than-average health care costs. Healthy consumers, however, often forgo insurance, reasoning that it is cheaper to pay directly for their lower-than-average health care costs. This imbalance results in adverse selection, a negative feedback loop in which rising insurance premiums cause the healthiest consumers to opt out of their plans, increasing the average risk of the pool. Insurers raise prices to offset that risk and the cycle begins again.

Question:
It can be inferred from the passage that those who buy individual health insurance
A) always pay higher health insurance premiums than employed people
B) opt out of the workforce for health reasons
C) are not as healthy, on average, as those who don’t buy individual health insurance
D) are partially responsible for the economic phenomenon known as adverse selection
E) would pay lower health insurance premiums if they were employed

(C) Those who buy individual insurance may or may not be employed. Those who do not buy individual insurance may be covered under employer plans, or they may not have insurance coverage at all. The passage does indicate that unemployed people who buy individual insurance are generally in poorer health than the overall pool of employed people, but this choice does not distinguish between the employed and the unemployed.

The passage suggests that people with poor health are more likely to buy health insurance while those who are healthy tend to forgo it. Doesn't that mean on average that those who buy individual insurance are not as healthy? And isn't this also the reason of the higher premiums, because the there are more poor health customers than healthy individual insurance buyers?

Your help will be much appreciated! Thanks! :)

[tommywallach]

Hey Xjen,

Great question here. What you're forgetting is that the people who "don't buy individual health insurance" actually fall into TWO categories.

#1: The unemployed people. (Who are in poorer health...)
#2: The employed people (who might very well be in great health, because they have jobs, money, health insurance!)

If answer (C) only compared the unemployed people who have health insurance to the unemployed people who don't health insurance, it would be correct (the unemployed people would be sicker, on average). But it forgets that people who don't buy individual health insurance could be made up primarily of employed people who don't have to buy insurance, because it's provided by their employer.

Hope that helps!

-t

[xjenyan]

Hi Tommy,

I just want to make sure I understand what you're saying. So the reason (C) is incorrect is because the number of employed people who don't buy individual insurance (insured through employers) could be unhealthy as well, enough to offset the number of unhealthy people who buy individual insurance, so that the statement that individual insurance buyers are on average not as healthy as those who don't buy individual insurance can't be made?

Thanks,
Jenny

[tommywallach]

Exactly! It could be that the people who buy their own insurance even though they're employed are SUPER healthy, so they pull up the unemployed buyers to a level above the employed non-buyers. (And yes, I don't think I explained it perfectly my first go-around, so thanks for following up!).

-t

[xjenyan]

That was very helpful. Thanks, Tommy!

[tommywallach]

Glad to help!

-t