Stabilizing Premiums Under the Affordable Care Act: State Efforts to Reduce Adverse Selection

Stabilizing Premiums Under the Affordable Care Act: State Efforts to Reduce Adverse SelectionACA Implementation—Monitoring and TrackingLinda J. Blumberg and Shanna Rifkin, The Urban InstituteSabrina Corlette and Sarah J. Dash, Georgetown University Health Policy InstituteNovember 2013Urban Institute Stabilizing Premiums Under the Affordable Care Act2IntroductionThe Patient Protection and Affordable Care Act (ACA) makes an array of changes to private health insurance market rules that will lead to greater sharing of health care costs between those who have high health care needs and those who are healthier at a particular point in time. It also sets up entirely new marketplaces—exchanges—through which individuals and small businesses can purchase private health insurance, while largely retaining a marketplace for individual and small group coverage outside the exchanges. As a consequence of this significantly reformed market, insurers, regulators, and policymakers have raised concerns about short-term “rate shock”—an increase in health insurance premiums as a result of enhanced consumer protections and the more equal sharing of risk compared with today’s market. There are also concerns about longer-term instability due to adverse selection, or the phenomenon by which particular insurance plans or insurance markets attract an enrollment with higher than average health care risks. The ACA includes a number of strategies intended to protect against and mitigate the effects of both “rate shock” and adverse selection. For example, the federal law requires that all citizens and legal residents purchase health insurance in 2014 or pay a fine, provides for significant premium tax credits to make coverage more affordable to individuals regardless of their health risk, makes available catastrophic health insurance plans for young adults or those otherwise unable to afford coverage, requires individual and small-group plans to meet certain standards whether or not they are offered through an exchange, generally requires insurers to treat all their enrollees as part of a single risk pool inside or outside the exchange, and establishes risk adjustment and reinsurance programs to reduce the incentives to health plans to deliberately select or attract lower-risk enrollees and/or deter higher-risk enrollees. These strategies will help reduce adverse selection but they are unlikely to eliminate it. In addition to strategies set forth in the federal law, states have the flexibility to implement additional approaches aimed at further decreasing the likelihood and impact of rate shock and adverse selection on consumers and health plans.This paper explores several strategies states could implement beyond federal requirements, using policy decisions in 11 states—Alabama, Colorado, Illinois, Maryland, Michigan, Minnesota, New Mexico, New York, Oregon, Rhode Island, and Virginia—to illustrate the array of choices being made. While rate shock and adverse selection are potential concerns in both the small group and individual insurance markets, we focus exclusively on strategies in the individual market, the market most susceptible to adverse selection. We explore mechanisms intended to reduce adverse selection against the individual market in the early transition years of the reforms—those intended to address the rate shock concerns, as well as those designed to ensure stability in the individual market and the individual exchanges in the long-term. These strategies and the states adopting them are summarized in table 1.Our findings indicate that study states had mixed approaches to mitigating rate shock and adverse selection, with some taking steps beyond the required federal measures but with other policy options left unexplored. Minimizing the impact of adverse selection—both against the overall insurance market and the exchanges—will require strong monitoring and oversight.BackgroundAdverse selection can occur for a variety of reasons, including plans having characteristics that tend to attract enrollees with higher needs (e.g., broader choice of providers, effective chronic care management programs), insurance market rules making particular markets more accessible to high-cost people, or insurers and their representatives exhibiting different types of marketing and enrollment behavior. Depending on the ways in which rates are set in affected markets, adverse selection can lead to higher premiums for plans selected against and, in the extreme case, can destabilize plans or markets to the point of unsustainability. As a result, insurers have strong incentives to avoid adverse selection and considerable attention has been paid to developing public policies that can mitigate the likelihood that it will occur under health insurance reform. Stabilizing Premiums Under the Affordable Care Act3Table 1. Short-Term and Long-Term Adverse Selection Mitigation StrategiesAdverse Selection Mitigation StrategyExplanation of StrategyStates