How to Curb Adverse Selection in the Individual Health Plan Market

August 31, 2018 - Maintaining a profitable individual health plan product is already challenging, but adverse selection can create additional problems that impede a payer’s ability to control health plan costs.

Policies within the Affordable Care Act, such as the individual mandate, risk adjustment program, and risk corridor program, were intended to prevent payers and consumers from unbalancing risk pools or tweaking plan designs to encourage favorable enrollment patterns.

However, federal actions to remove the individual mandate and halt the payment of risk corridor funds are reopening the possibility of adverse selection within the insurance market.

Industry organizations, actuaries, health plans, and other experts warn that adverse selection may create new problems for health plan profitability, beneficiary access to health plans, and insurance market stability at a national scale.

How can insurance market stakeholders identify the characteristics of adverse selection and maintain a stable, equitable relationship between payers and beneficiaries?

What is adverse selection?

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Adverse selection is defined as a situation where either a buyer or seller has the ability to affect the quality of a certain product.

In the health insurance market, adverse selection occurs because consumers with high health risks and more costly needs are more likely to purchase insurance than consumers who are healthy. Adverse selection increases the cost of providing benefits to consumers since payers must account for the increased care costs of unhealthy beneficiaries.

The ACA tries to limit adverse selection behaviors, such as when consumers wait until they are sick to purchase insurance, with strict open enrollment periods.  The law also leveraged the individual mandate to ensure that healthier, low-cost members contributed premiums to offset the expenses of caring for complex patients.

Before the ACA, healthcare payers could participate in adverse selection by denying coverage or increasing the cost of premiums for beneficiaries with high-risk health behaviors such as smoking, alcohol and drug abuse, and other habits that exacerbate chronic diseases.

Currently, the ACA guarantees that an individual can receive comprehensive insurance regardless of their pre-existing conditions.

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However, KFF found that payers may continue to avoid enrolling unhealthier enrollees through risk selection. A payer could choose to no longer participate in individual health plan markets that have more costly members.

The ACA also allows health plans to provide health plans in metallic-level tiers so that more expensive plans cover more medical benefits. However, payers are required to provide a basic qualified health plan (QHP) that is accessible to the majority of marketplace consumers.

What factors lead to adverse selection in the individual health plan market?

Adverse selection is a consumer risk within the individual and small group ACA market as the individual market risk pool becomes unbalanced.

An unbalanced individual risk pool develops when individuals with fewer known health risks purchase the cheapest health plans with minimal benefits, which inflates the cost of providing health plan benefits.

Factors that are likely to unbalance individual risk pools include increased market exclusion of high-income health plan consumers, expanded competition from health plan with less comprehensive benefits, and reduced payer participation in the individual market.

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CMS estimates individual health plan enrollment declined by 10 percent between 2016 to 2017 from adverse selection behaviors of high-income beneficiaries and the unbalancing of risk pools.

Individuals and families that earn incomes between 100 and 400 percent of the federal poverty earn subsidies, called advanced premium tax credits (APTCs), to afford ACA plan premiums. Premiums between 2016 and 2017 increased by 12 percent, which means that individuals with incomes above 400 percent of the federal poverty level would have to pay the increased cost.

The growth of individual plan premiums increased as the individual market had a greater number of low-income beneficiaries than high-income members. Premium increases ultimately led higher income beneficiaries to unenroll in individual plans. Adverse selection of individual health plans climbed significantly over the last two years.

“The decline in the non-APTC portion of state markets grew larger and more widespread between 2016 and 2017,” CMS said. “Non-APTC enrollment declined in 43 states, with six states losing over 40 percent of their non-APTC enrollment.”

The Academy of Actuaries warns that the association health plan (AHP) competition is also a major risk that destabilizes individual health plan risk pools.

AHPs are low-benefit, low-premium health plans that are formed by a group of individuals in a related industry, neighborhood, or geographic area. The Department of Labor expanded the availability of AHPs so that individuals may enroll in AHPs outside of the ACA market.

The Academy believes that AHPs will present significant adverse selection risk as healthier and high-income individuals elect choose an AHP over a comprehensive ACA plan.

Beneficiary migration from the ACA market to the AHP market over several years may lead to higher premiums and health plan costs. The Academy predicts that the ACA market will only serve the nation’s unhealthiest and most vulnerable members as the AHP market grows nationally.

Payers exiting the market and participating in risk selection can cause higher rates of adverse selection.

In, 2017 large commercial payers including Aetna, Humana, and BlueCross Blue Shield organizations left the ACA’s health plan exchanges shifted the financial risk of the individual market onto the remaining payers. The payers cited million-dollar losses as the reasons for the exchange exits, and instead targeted more profitable market opportunities.

The exit of major commercial payers has left a handful of states with only one payer that offers individual insurance. The few remaining payers are now accountable for the growing number of unhealthy beneficiaries, premiums costs, and other financial risks.  

What should payers do to avoid or limit adverse selection?

Payers can balance risk pools by offering cost-effective healthcare benefits such as tailored cost sharing, and by creating valuable health plans for high-income beneficiaries.

Adding valuable benefits could encourage beneficiaries who wouldn’t normally enroll in a health plan to purchase a new plan.

The demand for holistic wellness benefits that help beneficiaries manage their personal health and wellness goals is increasing year-to-year, which provides extra incentives for beneficiaries to purchase a plan. The most popular wellness benefits include gym memberships, financial incentives to meet healthcare goals, and access to conveniently-located health clinics.

Adverse selection presents a destabilizing effect on the profitability of payers and healthcare access for millions of beneficiaries.

Payers in the individual health plan market that develop an awareness of adverse selection risks and implement the appropriate action plan could curb the detrimental effects of adverse selection.