Tag Archive: off exchange market

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. 

Observations and questions on exchange plan losses

Reading media accounts of health plan issuer complaints of losses on plans sold through state health benefit exchanges, one might think all individual plans are sold through the exchanges. That false perception has implications for gauging the success of the Patient Protection and Affordable Care Act’s individual market reforms since the exchanges are only one element of them. Other key components affect all individual (and small group) plans regardless of whether they are sold on the exchanges or outside of them such as modified community based rating barring medical underwriting of individuals and pooling all individuals and small employers into single state risk pools.

The tendency to view the individual market as one and the same with the exchanges appears driven at least in part by too little data on the off-exchange individual market as compared to exchange qualified health plans. Even though the number of off-exchange plans exceeds those sold on the exchanges in many states, “[th]e lack of transparency about this market will be a growing problem for consumers and regulators,” noted Joel Ario of Manatt Health Solutions and Katherine Hempstead of the Robert Wood Johnson Foundation at the winter meeting of the National Association of Insurance Commissioners (NAIC).

Another aspect of the complaints of exchange plan losses hasn’t been covered in any detail. While some health plan issuers say exchange plans are a money loser due to high medical utilization, they could also dislike having to meet additional compliance and plan administration requirements for exchange participation that makes them unattractive. Particularly if they don’t also offer Medicaid managed care plans serving a demographic more closely aligned with those who purchase coverage through the exchanges.

Finally, more examination and reporting are needed on what’s driving reported losses among plans sold on the exchanges. The frequently reported rationale is it’s because exchange plans enrolled people who are “sicker than expected.” Sicker with what, exactly? Are the losses being incurred by those eligible for cost sharing subsidies in silver plans given that most exchange plans purchased are higher deductible bronze and silver-rated plans? Are those enrollees not eligible for out of pocket cost sharing burning through the deductibles with high cost care such as outpatient surgeries and hospitalization?


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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