The Insurance Pool

An insurer offered health coverage at a single price. People who knew they were sick signed up eagerly. Healthy people looked at the price and thought, “I probably won’t need that.”

With mostly sick people in the pool, claims exceeded premiums. The insurer raised prices. More healthy people dropped out. Prices rose again.

Each price increase drove away the people the insurer most wanted — the healthy ones — and retained the ones who cost the most. The pool spiraled toward collapse.

The insurer’s mistake was not the price. It was offering the same terms to people with very different private knowledge about their own risk.