Personalized Medicine, Prevention Effort and Adverse Selection

Abstract: We study the consequences of personalized medicine (defined as the use of personal genetic characteristics for medical purposes) in a context where some people are more precisely informed about their individual probability of developing a disease than others, and where individuals freely choose whether to reveal this more precise information to insurers or not (so-called “consent law” legislation). In our model, this information is helpful to tailor some prevention effort in order to decrease the probability of developing the disease (primary prevention). We study the equilibrium insurance contracts offered by a competitive fringe of insurers when the prevention effort is observable and contractible, and when an exogenous fraction of individuals has performed the genetic test. Our main objective is to understand the type of insurance contract offered at equilibrium (pooling or separating) as a function of the fraction of individuals who take a genetic test, and of the cost of the prevention effort. Our secondary objective is to study, in the case of separating contracts, whether the separation of types according to their risk is made by under-providing insurance to the low risks, and/or by forcing them to change their level of prevention effort.