What is Adverse Selection?
Adverse selection describes a situation where individuals with higher health risks buy more insurance. When claims increase as a result of sick people buying health insurance, premiums go up too. Young, healthy people will not buy health insurance because they feel it costs too much. Worse, they buy it only when they become sick or have an accident. So the pool of insurance owners does not have enough healthy people to cover the medical claims of the high risk individuals.
The Affordable Care Act Seeks to Prevent Adverse Selection
The Affordable Care Act has address adverse selection in several ways.
- The Individual Mandate: to obtain coverage was designed to fight against adverse selection. Generally, the young and healthy population has avoided obtaining coverage because they only saw healthcare coverage as an extra expense with no benefit. The mandate will force these young and healthy individuals to obtain coverage (hopefully through the exchanges) which will diversify the risk of the group.
- Premium Subsidies: and cost sharing reductions are only available if coverage is purchased through the Covered California health insurance marketplace. This should entice more people to purchase coverage through an exchange rather than through a private market insurer.
- Transparency: requirements for plans that wish to be sold through exchanges are more stringent than for plans offered through a private insurer. Thus, the plans offered through the exchanges will provide more in-depth information about each plan, giving consumers a better chance of finding coverage that best suits them. This additional coverage information will hopefully attract consumers to the exchanges, and help combat adverse selection.
Covered California Can Control Adverse Selection in the Market.
The Covered California health insurance marketplace as active purchaser can penalize or exclude from participation insurance companies that violate insurance market regulations through sales tactics that actively market only to the healthiest while directing higher-risk consumers to the Exchange.
Exclusive and Competing Markets.
The Exchange will not be the exclusive marketplace for California health insurance. The core population of Californians who will be using the California Health Benefit Exchange will be modest income individuals and small, low-wage employers. These individuals and employers must enroll through the Exchange to receive tax credits or subsidies. Any individual or employer with less than 50 employees may voluntarily participate in the Exchange. To the extent a residual market outside the exchange exists, care must be taken to ensure that identical rules apply to health insurance benefits regardless of where they are sold to avoid adverse selection. Comparable benefit packages must be offered both in or out of the Exchange, otherwise, sicker patients will gravitate toward the market where more comprehensive coverage is sold.
In California market rules both inside and outside the Exchange will be mirrored as closely as possible. The Exchange will automatically attract individuals who are subsidy-eligible, but if the Exchange is to achieve the vision of being a vibrant marketplace that leads small businesses and individuals to individually tailored plans, then the plans offered inside the Exchange must deliver attractive benefits that consumers actually want to buy. If benefit designs inside the Exchange are already limited to the “precious metals” and one catastrophic plan, does that mean the direct market now has the incentive to get creative with plan designs and premiums? To the extent the rules are different outside the Exchange versus inside, there is room for market manipulation. California will need to consider how strongly to link rating rules inside and outside.
Future Risk Adjustments Will be Required
The Exchange will likely need to provide additional protections against adverse selection. Because the Exchange concept is novel , its risk profile will not be readily predictable, so it is crucial that the Exchange establish the capacity to collect pertinent and essential data on consumer profiles, patient health, benefit usage, etc. Appropriate and timely analysis of these data should reveal the best methods to adjust risk effectively.