Question

The affordable care act what changes would you recommend to address the problem of adverse selection?

Answer 1

One of the big problems that insurers are facing is that too few healthy people, and too many sick people, are signing up for the plans sold through the exchanges. For insurers, that changes everything. Faced with higher claims per enrollee than they expected, they seek to raise their prices, which makes healthy people, especially young healthy people, even less likely to sign up the following year. If unchecked, this process could lead to a spiral of rising prices and falling enrollment.

Adverse selection represents a formidable challenge to insurance exchanges as it does to the insurance market in general. Under the ACA, this risk may be exacerbated by grandfathered plans, which may offer limited coverage at favorable prices for healthy consumers, and by the possibility that small business may choose to self-insure as long as their employees are healthy. The ACA’s precautions to reduce adverse selection include the individual mandate and a range of risk-adjustment mechanisms. Within SHOP, employer selection of coverage tier may also reduce the risk that primarily less healthy individuals will purchase more generous coverage.

Recommended measures:

1. Since affordability is a big issue, the federal government could spend more money to bring down the costs that individuals and families face. This could be done directly by raising the level of subsidies available for plans purchased on the exchanges, or raising the income thresholds at which the subsidies phase out—or both. Alternatively, the government could offer more generous subsidies to insurance companies, particularly those serving high-risk populations, in which case they wouldn't have to raise prices as much, or impose such large deductibles.

Lack of competition is now a big problem—according to the Obama Administration, about twenty per cent of the users of the federal exchange, HealthCare.gov, will now find only one insurer offering coverage. One way to tackle this issue would be to subsidize insurers that enter these markets.

To address the issue of excessive deductibles and out-of-pocket costs, it may be require all insurance plans to offer three doctor visits a year that don't count toward a deductible. For families whose out-of-pocket costs come to more than five per cent of their income, she would also provide a new, refundable tax credit of up to five thousand dollars.

This will help them verify the consumers, and hence decrease adverse selection problem

2. An obvious way to address this problem would be to drastically raise the fines that people face if they don't purchase insurance. Under the terms of the Affordable Care Act, getting enrolled wasn't meant to be a choice—it was a legal obligation. For political reasons, however, the penalty for flouting this "individual mandate" was set at a very low initial level, which is supposed to grow gradually. In 2015, the fines started at three hundred and twenty-five dollars per adult. This year, they started at six hundred and ninety-five dollars. (The actual figure is set by formula that takes into account a person’s income.) Since the annual cost of an insurance plan can reach four or five thousand dollars, many individuals—particularly young and healthy ones—may well be tempted to forego insurance, accept the penalty, and hope they don’t get sick. And actually, they may not end up paying anything. If an individual doesn’t pay the fine voluntary, the only way the government (in this case, the I.R.S., which oversees the system) can extract payment is by subtracting the amount due from a federal-income-tax refund. If the person isn’t due a refund, he or she doesn’t pay anything.

3. Raise penalties for non-compliance and enforcing them effectively by the insurance firms.

4. Requirement to maintain minimum essential coverage, §1501. Designed to bring a more balanced risk profile to the entire marketplace, the purchase mandate is perhaps one of the most important checks on adverse selection in the ACA. Although many of the states have challenged its constitutionality, the individual responsibility requirement is considered by health policy experts across the spectrum as a strong tool to minimize adverse selection. In order for this tool to work, individuals must decide that purchasing coverage is a better value for them as opposed to remaining uninsured and paying a penalty. Many have criticized the penalties as being too low to fully realize the intent of the individual mandate.

5. Financial assistance with purchasing coverage, §1401. Individual premium tax credits and small business tax credits are another important tool for encouraging people to buy insurance. Like employer contributions to group coverage, these credits bring down the cost of coverage for healthy individuals. This has the potential to lower prices for everyone by reversing the adverse selection spiral, because these healthy individuals remain in the pool. Furthermore, by making these credits available only for coverage purchased through the Exchange, the ACA also addresses adverse selection between the outside market and the Exchange. While the individual premium tax credits are permanent, the small business tax credits are not and, beginning in 2014, are only available to employers for two consecutive tax years during which benefits are offered to employees through the Exchange.

6. Same plan, same premium, §1301(a)(1)(C)(iii). The premium rate for qualified health plans must be the same, without regard as to whether it is sold through the Exchange or whether the plan is offered directly from the insurer or through an agent.

7. The same rating rules apply, regardless of market, §1252. Non-grandfathered plans inside and outside the Exchange must use the same rating factors, which are limited to age (3:1 ratio), geography, family size and tobacco use.

8. Organizing coverage levels by tier, §1302(d); and requiring all non-grandfathered small group and individual plans to include the “essential health benefit package,” §1302

9. Risk-spreading mechanisms, such as interim reinsurance, temporary risk corridors, and risk adjustment. These three mechanisms are designed to make the new marketplace more predictable, stable and less risky for insurers, encouraging the