Adverse Selection in the Individual Health Insurance Market
Abstract: Issuers participating in the Health Insurance Exchange (the exchange) have always been concerned about adverse selection. The community rating on the exchange combined with lack of information on the insurees’ health, risk preference, and propensity to use healthcare services makes the on-exchange plans vulnerable to adverse selection. Severe adverse selection will force insures to leave the market, undermining the affordability of insurance plans, eventually hurting consumers’ welfare. In this project, we propose to examine the adverse selection among ACA insurees using the enrollment and claim data from Anthem’s 14 operating Federal exchange states. We will focus on two types of adverse selection in this population: riskier individuals’ enrollment in more generous plan, and their strategic decisions on when to enroll and how long to stay covered. We will assess the degree of adverse selection among the on-exchange insurees using commercially insured small group as reference. We will analyze the role played by different benefit design parameters at the service type level in attracting on exchange insurees of different risk types. Finally, we propose to develop a structural model that incorporates adverse selection in both plan generosity and enrollment duration to predict insurees’ plan demand, and estimate the welfare change if some plans were removed from the market.