Why Adverse Selection is Likely on the HIEs: A Simple Model of Enrollment Behavior


We believe it is more likely than not that premiums paid by (or on behalf of) enrollees on the health insurance exchanges (HIEs) will be insufficient to cover both claims costs, and the operating costs of the health insurers participating on the HIEs

Whether consumers find value in health plans depends on the relationship between a given consumer’s net costs for premiums, and the expected value of claims the health plan might pay on the consumer’s behalf

In 2014, at a given premium level average deductibles for plans purchased on the health insurance exchanges (HIEs) will be much higher than plans purchased at similar premium costs in 2013. I.e., at a given premium level, plans sold in 2014 will pay claims for fewer consumers (because fewer will have costs exceeding the deductible)

We estimate the age / income mix of HIE enrollees by assuming that all persons for whom coverage is free or nearly free (Group 1) will enroll, and that all persons for whom coverage is not free, but for whom expected claims paid exceeds net premiums (Group 2) will also enroll. We then examine how many members of the remaining potential enrollees (those for whom coverage is not free, and for whom expected claims do not exceed net premiums – Group 3) must enter the market if premiums are to match claims

Under these assumptions, 37pct of Group 3 must enroll in order for premiums to match paid claims (‘100 MLR’) across the entire market. To reach a 92MLR, the highest MLR that is likely to allow for coverage of health plans’ operating costs, 64pct of Group 3 must enroll. The market cannot reach the traditional for-profit MLR benchmark of 85 – at 100pct enrollment of all Group 3 beneficiaries, the modeled MLR is 85.5

There appears to be little if any chance that MLRs for HIE plans will meet the prevailing for-profit standard of +/- 85MLR. And, we believe the Group 3 enrollment required to reach a 92MLR is unlikely to occur – in large part because it implies an unrealistic level of participation among healthy, risk tolerant (i.e., younger) persons

It follows that we expect significant premium inflation in and beyond 2015, and further expect that the legislation and/or regulations governing the HIEs will have to be modified if the HIEs are to remain viable. Policy options include: allowing greater differences in premiums based on age, allowing significantly higher out-of-pocket maximums, reducing the scope of benefits contained within the definition of minimum essential coverage, increasing subsidies, and/or increasing penalties

For our full research notes, please visit our published research site

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