Are state health benefit exchanges undergoing adverse selection?

A trend worth watching is health plan issuers opting not to sell individual plans on state health benefit exchanges while continuing to offer them outside the exchanges. Health plan issuers withdrawing from exchanges for plan year 2017 cite high losses on exchange plans for the decision to withdraw.

This naturally raises questions as to why losses are higher on exchange plans compared to off exchange plans and whether the exchanges are prone to adverse selection and if so, why. It’s an area ripe for research by health policy and actuarial research organizations. It’s also critical to the future of the Patient Protection and Affordable Care Act’s health insurance market reforms given the central role of the exchanges to restore the individual market to functionality by making coverage affordable for low and moderate income households with advance premium tax credit and out of pocket cost subsidies. That combined with the law’s mandate the individuals be pooled into a single statewide risk pool were designed to improve the essential risk spreading function upon which all types of insurance is based. However, if the risk profile of exchange enrollees is inordinately poor compared to the individual state pool as a whole, it could explain why some health plan issuers have opted out of the exchanges.

One possible reason is the well-established positive correlation between socio-economic status and health status. Since the exchange population is by definition low and moderate income, that correlation could be a factor since the correlation predicts those with poorer health status are more likely to utilize medical services. Another possible contributing factor is an insurance concept known as morale hazard. Morale hazard arises when those with insurance coverage figure that since they are protected from loss, they don’t have to worry as much about a covered loss event or taking steps to prevent one. In other words, insurance can ironically increase the risk of loss because insureds become less vigilant to avoid one in the first place such as eliminating fire hazards in a dwelling or obeying traffic laws and driving carefully in the case of vehicle insurance.

The correlation between lower household socio-economic status and poorer health status may also reinforce morale hazard on the exchanges since those with the lowest incomes will have relatively minimal personal financial risk since they qualify for out of pocket cost sharing on some silver level plans.

When it comes to health, American society is fraught with morale hazard. It tends to place too little value on maintaining and supporting healthy lifestyles and regards medical services as a consumer commodity to be shopped and consumed. Particularly when someone else is paying for those services when packaged as a benefit or entitlement. That’s a formula for increased medical utilization with negative and potentially fatal implications not only for the exchanges, but for the nation’s health care system as a whole.

 


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 fpilot@pilothealthstrategies.com or call 530-295-1473. 

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Frederick Pilot

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