Kaiser Family Foundation
Health Care Costs
Whenever consumers have a choice among different insurance arrangements, there is a tendency for people to choose a level of insurance based on their expected need for what is being covered (in this case health care). At any given price, people with a relatively high perceived need for the covered item are more likely to want coverage (and given coverage, more likely to want generous coverage) than people with a lower perceived need for the covered item. This is often referred to as “adverse selection.” Since high deductible plans generally are less generous than typical insurance policies — particularly for people with employer-sponsored coverage — some have raised concerns that CDHPs could disrupt the pooling of health risk in insurance markets.
To demonstrate that a relatively small share of enrollees can have a meaningful impact on average claims costs, we present an exercise using a database of medical claims complied by the Society of Actuaries.
What we can see from this exercise is that adverse selection can occur and have a meaningful impact on claims cost even where there are no extreme changes in enrollment. The enrollment shifts portrayed here would be far too small to substantially change the demographic make up of either pool in terms of age, gender, income, or other observable factors — even the 60%/40% scenario only increases the overall census of the adverse selection pool by 2%. Generalizations about enrollment would not reveal the real differences in underlying claim costs. If bias enrollment patterns such as these persist and insurers base premiums on claims experience, or if insurers can anticipate enrollment bias and base their premiums on expected claims, then these small enrollment differences would translate into fairly significant premium differences.
http://www.kff.org/insurance/snapshot/chcm111006oth2.cfm
Comment:
By Don McCanne, MD
This study demonstrates the simple fact that shifting a very few high-cost patients from one insurance pool to another (adverse selection) can have a very dramatic impact on the premiums that must be charged to cover health care costs for the pools.
This phenomenon is of much more concern now because of the greater use of cost sharing, especially though higher deductibles. People with needs will avoid those plans since they would be exposed to unaffordable out-of-pocket expenses. More comprehensive plans will attract the higher cost individuals, and the shift of only a few would make the premiums unaffordable. People with needs are being priced out of both coverage and health care.
Many policies have been suggested to eliminate adverse selection through risk adjustment. They don’t work. Separate high risk insurance pools have been established in several states to insure these people. They don’t work.
Medical underwriting is used in many states to be certain that pools can continue to exclude higher cost individuals, thereby ensuring that pooling will never work.
With a single, universal risk pool, adverse selection disappears. Why do we continue to avoid the inevitable?