ACA enrollment and adverse selection: the jury's still out
News that the Affordable Care Act (ACA) is enrolling younger people at slower rates than older people has sparked a new round of hand-wringing about whether the ACA’s marketplaces will actually work. Stable insurance markets depend on sufficient enrollment of healthy people to help pay for care to enrollees who get sick. Average care needs increase with age, hence the emphasis on getting young people to sign up.
Recent studies, however, caution against jumping to the conclusion that the new marketplaces will suffer from adverse selection—that is, have too few healthy enrollees to cover its costs. Age and health status, though connected, are not the same. Since the ACA prohibits insurers from asking applicants about their pre-existing conditions, we actually don’t know the health status of enrollees. And the rate of enrollment by younger people (and healthy people) may pick up in the next couple of months, especially since many more younger than older people qualify for the ACA’s subsidies based on their lower incomes.
But what if by March 31, when enrollment closes for the year, young people actually have not signed up at the rate of older people? Does that mean that insurers’ revenues will fail to cover enrollees’ actual expenses?
Careful analysis shows that the ACA actually has more leeway and more time to achieve a financially viable enrollment balance than is commonly assumed. The leeway comes from three sources. The first, how much cushion against adverse selection insurers have given themselves in setting premiums, is unknown. But the second is that insurers can charge up to three times more for older than for younger enrollees.
How well that differential protects them against a skewed age distribution (assuming average health status by age) actually is not only knowable but documented by researchers at the Kaiser Family Foundation. They simulated the effect of low and very low enrollment rates by people ages 18 to 34, comparing average spending by age (plus average overhead and profits) to average age-based premium revenues. They found that if younger people were 25 percent less likely to sign up than older people, costs would be about 1.1 percent higher than premium revenues; if they were half as likely to sign up, costs would exceed revenues by about 2.4 percent.
Clearly, that’s not good news for insurers. But since their profits are typically 3 to 4 percent above costs, Kaiser researchers note, they’d still be in the black. And analysts at the Urban Institute point out that insurers hit by adverse health risks, independent of age, are explicitly protected by provisions the ACA made in anticipation of skewed enrollment in early years.
As these researchers point out, for the first three years of the ACA, insurers’ third source of protection is that they are themselves insured—technically, reinsured—by the federal government for very high cost enrollees whose spending exceeds $60,000. For plans whose aggregate losses exceed 3 percent of revenues, the federal government shares the tab. Milliman researchers actually find these mechanisms are structured to make older and sicker enrollees more profitable than healthy enrollees—in their view, turning risk selection on its head.
Kaiser researchers point out that insurers can also offset their 2014 losses by raising premiums in 2015. Given their analysis, they argue that an increase would be too small to significantly lower enrollment, to encourage a further increase in premiums, and to create a “death spiral” that destroys the market. But a prominent industry observer goes further to predict that insurers are unlikely to recoup small losses by raising premiums for 2015.
Urban Institute researchers argue that 2014 enrollment will be far smoother and the 2015 market therefore larger, as both buyers and sellers become used to the process. They predict that insurers’ desire to attract enrollment, already apparent in lower-than-anticipated premiums, will lead them to keep rates low through 2015 when the potential gains increase.
It will be a while before we know the outcome. But, all hype aside, we already know too much to buy the claim that the ACA’s marketplaces are doomed. On the contrary, if these researchers are correct, the hue and cry about adverse selection, like the outrage at the disastrous roll-out of Healthcare.gov, will be ancient history by 2015, and the ACA’s marketplaces will be well on their way to expanding coverage, as the law intends.