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Avoiding Adverse Selection in the Exchange

According to a new report funded by the Robert Wood Johnson Foundation and authored by Peter Cunningham, Ph.D., almost 40 percent of uninsured people eligible to receive subsidies through state-based health insurance exchanges have chronic conditions or report “fair” or “poor” health.

The report — entitled Who Are the Uninsured Eligible for Premium Subsidies in the Health Insurance Exchanges? — also predicts that about one-third of those uninsured and eligible for subsidies in the Exchange will have had no recent problems with their health, accessing care or paying medical bills.

Analysis

This healthy one-third is not only collectively younger than the less-healthy uninsured, they also tend to spend little on medical care—an average of $156 out-of-pocket annually. In addition they tend to have higher incomes, meaning they’ll receive smaller subsidies to purchase insurance. Therefore, for some, it may be financially advantageous for some of them to opt to pay the individual mandate penalty rather than enroll in an exchange.

Dr. Cunningham notes, however, that these young and healthy uninsured may not feel as invincible as is commonly assumed, and given affordable premiums, may enroll in exchanges to avoid potential future catastrophic health care costs.

Implications

While challenging, it will be important to enroll this healthy population in order to avoid adverse selection, or enrollment of only sicker-than-average individuals. If there is too high a ratio of costly patients in the Exchange, health insurance costs could be higher than expected. In a worst-case-scenario, health plans may pull out of the Exchange completely because it’s not in their fiscal interest.

In this way, PacAdvantage looms as a reminder of the importance to protect against adverse risk selection.

Recommendations

Although California’s 2010 Exchange legislation provides some protections against adverse selection, the Exchange will likely need to go further in developing strong risk adjustment mechanisms both inside and outside the Exchange.

Data collection is essential, as is research and analysis of the best methods to adjust risk effectively. There are programs that use it well, including Medicare Advantage and Germany’s health insurance program, which should be used as examples as the Exchange Board makes important risk-adjustment decisions, such as which demographic risk factors to include, whether or not to directly risk-adjust using health status, and how much to weigh these factors when it comes to health plan payments

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