Individual health insurers have largely avoided adverse selection with stringent underwriting standards aimed at excluding or surcharging those with health histories likely to produce high losses. Adverse selection threatens the viability of an insurance risk pool. If too many “adverse” risks enter the pool, its long term viability can be jeopardized since losses can exceed premium dollars coming into the pool.
In California however Anthem Blue Cross is experiencing what might be termed “adverse deselection” in its individual health insurance market segment: the migration of better risks (i.e. healthier policyholders) out of the risk pool, leaving behind poorer (i.e. less healthy policyholders more apt to produce high dollar losses). Anthem Blue Cross officials told a California legislative committee hearing this week this trend requires those remaining in the pool to pay higher premiums to make up the lost premium dollars that were formerly paid by those who dropped their coverage.
This development has major implications for the nation’s individual market. California has more people in the individual market — estimated at between 8 and 9 percent of individuals under age 65 — than the rest of the nation, where the number averages about 5 percent. Also, Anthem Blue Cross has the largest share of the California individual market. If the biggest writer of individual health coverage in the nation’s largest individual health insurance market is having trouble maintaining a viable risk pool, it could well be the harbinger of an impending death spiral in the nation’s individual health insurance market.
I suspect the prospective implosion of the individual market is generating more unspoken concern among the health reform policymakers in Washington than political firestorm Anthem Blue Cross’s rate increase has generated. Especially as more small employers consider dropping coverage due to their own rate increases, leaving their employees to fend for themselves in the individual market. The upshot: a big increase in the ranks of the medically uninsured that would provide further impetus for to get a reform bill passed. But it must collar the underlying rising medical costs driving up premiums that now threaten to take out much of the insurance market starting from the bottom up with the individual and small group segments.
Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email