Selection in Health Insurance Markets and Its Policy Remedies

Abstract

Selection (adverse or advantageous) is the central problem that inhibits the smooth, efficient functioning of competitive health insurance markets. Even-and perhaps especially-when consumers are well-informed decision makers and insurance markets are highly competitive and offer choice, such markets may function inefficiently due to risk selection. Selection can cause markets to unravel with skyrocketing premiums and can cause consumers to be under-or overinsured. In its simplest form, adverse selection arises due to the tendency of those who expect to incur high health care costs in the future to be the most motivated purchasers. The costlier enrollees are more likely to become insured rather than to remain uninsured, and conditional on having health insurance, the costlier enrollees sort themselves to the more generous plans in the choice set. These dual problems represent the primary concerns for policymakers designing regulations for health insurance markets.In practice, identifying selection problems and designing policy responses is not always straightforward. A natural starting point for uncovering selection distortions is a comparison of the chronic health conditions of consumers who elect more-versus less-generous insurance. However, selection can play out in complex ways that extend beyond issues of who remains uninsured and who chooses which plan.

Adverse Selection and Network Design Under Regulated Plan Prices: Evidence from Medicaid

“…We extend that literature to the zero-premium Medicaid setting, presenting results in a set of transparent figures that highlight the vulnerability of specialty hospital coverage to adverse selection. Second, we provide new evidence on the benefits (and limitations) of policies designed to correct selection-induced inefficiencies, such as risk adjustment and quality bonuses (Geruso and Layton 2017). Finally, we add to a literature highlighting inadequate specialty care access in Medicaid (Bisgaier and Rhodes 2011;Timbie et al 2019), providing a new explanation for this old phenomenon.…”

Plan Selection, Enrollee Risk, and Health Spending on the Patient Protection and Affordable Care Act Individual Marketplaces, 2019

“…Mean plan-level scores for all enrollees are used to transfer payments from low-to high-risk plans and mitigate incentives for insurers to selectively attract and enroll low-risk individuals to enhance their profitability or other enrollee selection activity by insurance companies. [25][26][27] In the HHS-HCC model, risk scores among identical enrollees vary by metal level due to induced demand, unobserved preferences, and ability to access care.…”

Industrial Organization of Health Care Markets

“…They are quite difficult to implement for both computational and strategic reasons. Ellis and Layton (2014) and Geruso and Layton (2017) provide nice bridges between conceptual discussions of riskadjustment transfers and empirical implementation of these transfers. One key implementation issue is that it is much easier to implement ex post risk-adjustment (based on actual realized claims) from a statistical standpoint.…”