Risk Selection and Adverse Selection: Two Problems of Guaranteed Health Insurance
One major problem with the Affordable Care Act (ACA) is the guaranteed availability of health insurance—regardless of age, preexisting conditions, or income. The guaranteed availability of health insurance violates the government’s Biblical jurisdiction. Just because something is good does not mean it is the government’s job to steward responsibility. The Old Testament declares that “[i]f you will diligently listen to the voice of the LORD your God, and do that which is right in his eyes, and give ear to his commandments and keep all his statutes, I will put none of the diseases on you that I put on the Egyptians, for I am the LORD, your healer,” (Exodus 15:26; ESV). Thus, returning government to its proper sphere of authority will amend the healthcare disparities that have been created by the ACA’s current system. Guaranteed health insurance availability has driven, “consumers who are most in need of health care . . . [to] purchase insurance,” (KFF). This issue forces insurance companies to take two routes; (1) accepting more individuals in need of immediate and costly medical services; and (2) the companies’ avoidance of sicker applicants. Specifically, the two main components to this problem of guaranteed health insurance availability, adverse selection and risk selection, subvert the design and efficiency of insurance markets. The ACA’s imposition of adverse selection and risk selection now threatens the purpose of the healthcare system’s reform. Adverse selection occurs when sicker applicants enroll in insurance resulting in “higher average premiums, thereby disrupting the insurance market and undermining the goals of reform” (KFF). Risk selection occurs when “insurers have an incentive to avoid enrolling people who are in worse health and likely to require costly medical care, (KFF). Adverse selection produces information disparities between insurers and those insured, creating “an insurance pool that is relatively sick and thus more expensive,” (Teitelbaum & Wilensky, p. 369). Worse, adverse selection produces a “death spiral;” as “the insurance pool gets continually sicker and more expensive, “more healthy people [are encouraged] to opt out of coverage,” (Teitelbaum & Wilensky, p. 369). Adverse selection causes “both the uninsured rate and premiums to increase,” (Teitelbaum & Wilensky, p. 369). Risk selection reduces market efficiency through an insurers competition to attract healthier people, “as opposed to competing by providing the most value to consumers,” (KFF). Thus, a system that guarantees the availability of health insurance undermines the purpose for which it was created.
Background
The inability to deny applicants is a primary issue with ACA-compliant health insurance. From the start, there were attempts to avoid adverse selection; the ACA originally imposed an individual mandate penalty after four years. Joel B. Teitelbaum and Sara E. Wilensky write that “[s]tarting in 2014, the ACA’s individual mandate required that almost everyone purchase health insurance or pay a penalty,” (Teitelbaum & Wilensky, p. 373). But “the individual mandate penalty was repealed [in] 2019, [while] the mandate itself . . . still [remains] part of the ACA,” (Teitelbaum & Wilensky, p. 368). Data reveals that “[o]pposition to the individual mandate has remained steady at 63% to 64% over the last several years,” (Teitelbaum & Wilensky, p. 368). The effect of “the repeal of the individual mandate penalty [now] makes it likely that some healthier individuals will choose a cheaper, less comprehensive option, leaving the ACA-compliant plans with a sicker and more expensive pool of enrollees,” (Teitelbaum & Wilensky, p. 373). This has led companies to seek younger candidates due to fears of adverse selection sway the problem to the other side of risk selection; thereby avoiding sicker candidates by focusing on younger healthier candidates. Teitelbaum & Wilensky note that “[d]ue to fears of adverse selection, analysts have been closely watching how many young adults (ages 18–34 years), who are more likely to be healthy, sign up for health insurance. Ideally, 40% of enrollees would be in this age range to prevent adverse selection,” (Teitelbaum & Wilensky, p. 369).
Landscape
Stakeholders include healthier individuals, sicker individuals, those with high-deductible health plans, private insurance companies, and Christians. Healthy individuals are stakeholders; as “adverse selection is likely to occur in the exchange plans as healthier individuals who do not believe they need a comprehensive plan—or do not want to pay a higher premium to participate in one—leave the exchange plan and move to a cheaper nongroup option,” (Teitelbaum & Wilensky, p. 373). Thus, sicker individuals are also stakeholders through their interest in lowering the cost of higher premiums, ensuring eligibility; and expanding access to healthcare. Similarly, those with high-deductible health plans (HDHP) consider the threat of adverse selection a “key concern”, (Teitelbaum & Wilensky, p. 323). Teitelbaum and Wilensky note that “[a]s the name suggests, these plans have very high deductibles (usually defined as at least $1,000 for an individual or $2,000 for a family). In 2017, annual premiums for the average HDHP were $6,024 for individuals and $17,581 for families (KFF, 2017),” (Teitelbaum & Wilensky, p. 323). Private insurance companies are stakeholders, aiming to mitigate the exodus of healthy individuals; as “[a] risk pool with adverse selection that attracts a disproportionate share of people in poor health, who are more likely to seek health coverage than people who are healthy, will result in increased costs to cover those in the pool, leaving those in better health to seek out a pool with lower costs,” (KFF). Similarly, Law Professor Roger C. Bern notes that “[b]ecause of the multiplicity of jurisdictions God has established on the earth, it is important to identify which has authority to act in any given situation,” (Bern, R., p. 111). Professor Bern expounded that “[i]f Civil Government attempts to limit or proscribe the substance of what parties might otherwise independently agree upon in otherwise lawful bargains, it acts not in its authorized role as an avenger against evildoers, but rather in a dominion role which has never been assigned to it,” (Bern, R., p. 148). The New Testament reiterates the Old Testament’s hierarchy of authority; “[f]or by him all things were created, in heaven and on earth, visible and invisible, whether thrones or dominions or rulers or authorities—all things were created through him and for him,” (Colossians 1:16; ESV).
Options
Options to address the problem include limitations on open enrollment periods, and providing subsidies to help with the cost of insurance, (KFF). Thus, “[t]o discourage behavior that could lead to adverse selection, the ACA makes it difficult for people to wait until they are sick to purchase insurance” (KFF). Three notable options— risk adjustment, reinsurance, and risk corridors programs—have been implemented to mitigate the problem of guaranteed healthcare availability, thereby minimizing adverse selection and risk selection. (1) Risk adjustment is a system of individual risk scores created to mitigate risk selection behavior, utilizing voluntary wealth redistribution by using payments to “[transfer] funds from plans with lower-risk enrollees to plans with higher-risk enrollees,” (KFF). The risk adjustment program’s goal is to “encourage insurers to compete based on the value and efficiency of their plans rather than by attracting healthier enrollees,” (KFF). But the current risk adjustment system does not incentivize value or efficiency; instead, it attracts applicants desiring immediate healthcare services. This option remains in use. (2) Reinsurance was another option created to protect against increasing premiums by “offsetting expenses;” collecting funds from all health insurance issuers and plans, (KFF). This allowed eligibility for payments to those within a specific income range who cannot pay. Reinsurance was previously implemented from 2014 until 2016. (3) The Risk Corridor Program aimed to limit losses and gains by “discouraging insurers from setting premiums high in response to uncertainty about who will enroll and what they will cost,” (KFF). The Department of Health and Human Services (HHS) “collects funds from plans with lower than expected claims and makes payments to higher than expected claims,” (KFF). This reduces concerns of information disparities associated with adverse selection while precluding risk selection. The Risk Corridor Program “set a target for exchange participating insurers to spend 80% of premium dollars on health care and quality improvement,” (KFF). Specifically, using coercive voluntary redistribution of wealth, “insurers with costs less than 3% of the target amount must pay into the risk corridors program; the funds collected were used to reimburse plans with costs that exceed 3% of the target amount,” (KFF). The Risk Corridor Program was previously implemented from 2014 until 2016.
Recommendation
The best-recommended course of action is returning civil government to its natural jurisdiction through a series of seven actionable steps toward privatizing healthcare. (1) America’s current risk adjustment system is flawed and must be reassessed; as it has failed to reduce adverse selection and risk selection, resulting in higher premiums, sicker applicants, and the exploitation and abuse of healthcare funding. (2) States should have the option to contribute to a private insurance benefit that rewards healthy behavior, (Heritage, p. 468). (3) Applicants who opt to select cost-saving plans should be incentivized. (4) The subsidized ACA exchange market needs to be separated from the non-subsidized ACA insurance market, (Heritage). Additionally, (5) applicable care must be readdressed; primary care physicians’ fixed fees should not be covered by insurance. (6) The Hyde Amendment and the Weldon Amendment must be codified; both prevent federal funding to be utilized for abortions, allowing federal funding only in cases of rape, incest, or life-saving exceptions, (CRS; HHS). Thus, the codification of both amendments will reduce “roughly $6.9 trillion, or 32 percent of GDP” annually; according to a 2022 Joint Economic Committee (JEC) report, (Heritage; JEC). Lastly, there should be (7) annual compliance audits; followed by a reduction in any violating state’s Medicaid funding by a maximum of 10 percent, (Heritage, p. 472). These modest steps will realign government to its proper sphere of authority; and facilitate the betterment of public health through incentivizing private insurance companies.
Bibliography
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