Health insurance exchanges: States must limit adverse selection

The state-level health insurance exchanges mandated by the Patient Protection and Affordable Care Act (PPACA) are expected to give consumers access to a wider array of better (i.e., higher quality and lower cost) health insurance coverage for the small-group and non-group markets when they go into effect in 2014. While a few state insurance exchanges have prospered (e.g., in Massachusetts and Connecticut), many previous attempts to create exchanges in California, Texas, Florida, Colorado, North Carolina and other states ultimately failed. For the new exchanges to succeed where few have before them, the U.S. Department of Health and Human Services and state governments will need to address 13 policy issues, noted Timothy Stoltzfus Jost, J.D., a professor at the Washington and Lee University School of Law, in the new Commonwealth Fund report, "Health Insurance Exchanges and the Affordable Care Act: Key Policy Issues."

The 13 issues are: adverse selection, numbers of participants, market coverage and structure, choice without complexity, transparency and disclosure, competition, administrative costs, the role of health plan certification requirements, the administration of subsidies and mandates, the potential role of regional or national exchanges, governance, relationships with employers, and cost control.

Of those issues, "the single most important reason why some exchanges have not succeeded in the past is that they became the victims of adverse selection--they were unable to capture a large enough share of the healthy participants in the insurance market," said Stoltzfus Jost. "In effect, these exchanges attempted to offer better coverage, or more affordable coverage, to too many individuals or groups with unfavorable risk profiles and were unable to attract enough healthy enrollees."

The PPACA includes some provisions that weaken incentives for adverse selection. However, adverse selection is still a possibility because the PPACA allows "both an individual and group health insurance market to continue to exist outside the exchange," said Stoltzfus Jost. Those outside coverage options mean that healthy people potentially will be able to find cheaper insurance outside vs. inside the exchange. "A particular concern is the possibility that employer-sponsored groups can 'self-insure' (thus escaping state regulation) as long as their employees are healthy, only to turn to the exchange once group members' health deteriorates," he explained. "In this way, an exchange can essentially turn into a high-risk pool, with its coverage becoming unaffordable and its enrollees becoming very unattractive to insurers."

Steps that states may need to take to further reduce adverse selection include the following: "prohibit insurers that participate in the exchange from establishing separate affiliates to sell only outside the exchange; prohibit insurers from selling only bronze or catastrophic coverage outside the exchange; or prohibit insurers from using marketing practices or benefit structures intended to attract healthy applicants to plans outside the exchange while discouraging unhealthy applicants," he recommended. In addition, "insurance regulators can monitor grandfathered plans carefully to make sure that they are not 'lemon dropping'--that is, encouraging high-cost enrollees to move to the exchange."

Furthermore, states that have an interstate compact could require plans to sell interstate policies only through the exchange, said Stoltzfus Jost. "States also could prohibit brokers from collecting higher commissions for plans sold outside the exchange, thereby discouraging them from steering business elsewhere."

To learn more:
- read the Commonwealth Fund report