Economic and Social Research Institute February 2003 Issues in Coverage Expansion Design
Coping with Risk Segmentation: Challenges and Policy Options by Elliot K. Wicks, Ph. D.
A factor that complicates almost all proposals to extend health insurance coverage is how to cope with risk segmentation in the small-group and individual insurance markets. Experience in these markets shows that if market forces are left to operate unfettered, people seeking private health insurance will be segregated into small risk pools that reflect their expected risk of incurring medical expenses and charged premiums accordingly. Premiums will vary widely across the spectrum of expected risk, and risk will not be widely shared. These are problems that generally do not plague large employers, because they are large enough to form their own risk pools and self-insure; that is, costs are sufficiently spread among higher-risk and lower-risk employees within the group. So the discussion that follows applies to health insurance for small employers and individuals buying coverage on their own.
Risk segmentation and the consequent wide variation in premiums create at least two kinds of problems. First, some high-risk people are not able to afford coverage. Second, the wide premium spread requires some people to pay much more than others for identical coverage, which many would consider inequitable.
Alternative Ways to Deal with Risk Selection
Prevent Risk Selection
Approach 1: Require insurers, in setting premiums, to community rate everyone.
Approach 2: Require everyone in some subset of the population who purchases coverage to buy from a common source and have each insurer base premiums on the experience of all its enrollees in the pool – for example, require all small employers to buy from a purchasing cooperative or insurance exchange.
Approach 3: Instead of charging people premiums, use public financing, as with the Medicaid and Medicare systems.
Approach 4: Single payer without health plans that accept any risk.
A single-payer system that did not put health plans at risk – as with fee-for-service Medicare – would solve both sides of the risk segmentation problem. Enrollees would not pay premiums, and thus there would be no difference in cost associated with risk differences. And insurers would not bear risk – they would just administer the system – and thus there would be no reason to compensate them for differences in the risk of the people they enroll. There would be no risk segmentation because there would be only one insurer – government.
Allow but Offset Risk Selection
Approach 1: Allow wide (though perhaps not unlimited) variation of premium based on price, but provide subsidies to help high-risk enrollees pay the high price they will face.
Approach 2: Make risk selection unprofitable by having a very good risk-adjustment process.
http://www.esresearch.org/newsletter/february03/risk_segmentation.pdf
Comment: This report describes the policy implications of various approaches to segmenting risk. It is worthwhile reading this nine page report because you will understand the problems that arise with each approach. Understanding risk segmentation makes it clear why it is so difficult, or, actually impossible, to ensure that everyone has equitable, affordable health care coverage. But the exception is the single payer approach which is unique because there would be no risk segmentation since there would be only one insurer – the government.
Why do we waste so much effort and expense on playing the risk segmentation game, perpetuating inevitable inequities, when we can save time and money and establish equity by dumping the health plans and establishing a single payer system? Do we have an aversion to logical solutions?