Should Smokers Pay Higher Health Premiums?

Should Smokers Pay Higher Health Premiums?

Outside the Beltway: "In a simple insurance market people would purchase insurance and their premiums would be based on how likely they are to get sick. There would be no pooling outcomes. To see this suppose there is a pool of individuals, some high risk and some low risk for needing health care. In this pool everybody pays the same premium for their insurance. However, a competing insurance company could lure away the low risk individuals with lower premiums (and higher deductibles) leaving only the high risk people in the initial pool. With the depature of the low risk people from the pool, the premiums would increase in the pool. This is why you'll hear economists sometimes say that a pooling equilibrium is always broken by a seperating equilibrium. It is the "cream skimming" strategy above."