Health Exchanges, Pricing and Adverse Selection

The individual mandate, employer mandate and the Medicaid expansion are the cornerstones of the supposed expansion of health care coverage that will occur as a result of the reform law.  Health insurance exchanges are critical to the performance of the individual mandate and are also used for Medicaid sign-ups.  Therefore, it is worth understanding how traditional health insurance markets have worked in terms of eligibility and pricing and how the new insurance exchanges may be affected by changes in those eligibility and pricing rules.  Recent research from the National Bureau of Economic Research attempts to do just that.   (NBER Paper)   The authors created a model of what would happen in the exchanges based on the pricing and eligibility conditions set by the ACA and on behavior exhibited by actual members in a large employer health plan.  They simulated several other pricing and eligibility rules and other aspects that could affect what happens in the exchanges.  The most notable conclusion is that the ACA pricing and eligibility rules will lead to extreme adverse selection, which essentially makes anything other than the Bronze plans, which have very poor coverage, unaffordable.  Allowing varying levels of health status pricing reduces adverse selection and improves the overall level of coverage available, although it may cause overall welfare loss.  The model indicates that absent subsidies or penalties, 26% of the population would opt out if health status pricing is not permitted, and those would be almost all the younger and healthier people, which means that policies will cost more for those who are in the exchange, creating a cycle with more dropouts, higher premiums, etc.  Very high subsidies (or penalties), on the order of $3000 a year, are required to keep this from happening in the model.   Experience thus far in the exchanges, although very limited, indicates that in fact only high risk individuals are signing up and most of those are going into Medicaid, which directly imposes a cost on the public, or are receiving large subsidies.  Unless this changes, the public is going to face a much larger tax bill for Medicaid and subsidies than the advocates of reform projected, and many fewer people are going to end up with insurance than was projected and the cost for those individuals will be higher that was estimated.  As the model used in this research paper suggests, all of this should have been anticipated and it should have been recognized that the law was not going to have the effects it was promoted to have.