Risky Business: State Approaches to Address Adverse Selection

On Monday, I got an early morning dose of health reform at AARP’s event “Launching Insurance Exchanges: What Are States Doing?” Officials from Colorado, Maryland, Virginia and Utah shared their perspectives and respective challenges in setting up Exchanges.  One issue that all of the state presenters discussed is adverse selection. Adverse selection occurs when healthy and less healthy individuals differentially select health plans according to their health needs.
The ACA has a few provisions designed to prevent adverse selection. For a summary and citations for these ACA provisions click here and click “read more” in the green box.  The ACA:

• Creates five benefit tiers for the Exchange based on actuarial value.
• Requires participating carriers to offer at least a silver and gold plan option in the Exchange and charge the same prices for products inside and outside the Exchange.
• Requires states to conduct risk adjustment.

However, plans that only offer coverage outside the Exchange face fewer rules. States may wish to enact additional policies that go beyond the federal law. Many states are still in the early stages of examining these issues, but some have begun to address the problem of adverse selection in their Exchange enabling legislation with specific requirements on plans that offer coverage through the Exchange.
Here are some approaches states are taking to address adverse selection in their Exchange enabling legislation:

• California’s enacted legislation requires Exchange carriers to offer plans at each of the five actuarial levels. Carriers that also sell coverage outside the Exchange must sell all plans that they offer through the Exchange outside the Exchange as well, creating a more even playing field.

• Minnesota’s introduced HF 497 limits carriers offering plans through the Exchange to one plan at the bronze, silver, gold and platinum levels. It requires qualified health plans sold in the Exchange to also be sold outside the Exchange and also prohibits carriers that stop offering qualified plans in the Exchange from offering another plan through the Exchange for a minimum of two years. The law intends to more evenly distribute plans inside and outside the Exchange. It also hopes to limit carriers ability to concentrate the majority of their plans at the lower actuarial value levels and discourage carriers from dropping out of the Exchange to only offer in the outside market.

• Maryland’s SB 182, which passed the legislature and is awaiting the governor’s signature, requires plan carriers offering coverage through the Exchange to also offer at least a silver and gold plan outside the Exchange, preventing carriers from offering only the most basic plans outside the Exchange.

• New Mexico’s SB 38, which passed the legislature, includes a provision that broadly requires the Superintendent of Insurance to promulgate rules designed to prevent adverse selection. It also requires the Exchange Board to create a plan of operation that includes recommendations for mitigating adverse selection.

• Enacted prior to the ACA, Massachusetts’ law requires plans to charge the same premiums for plans in or outside of the Connector, which is identical to the provision in the federal law.

Utah launched its Exchange in summer 2009 and, in order to combat adverse selection, has implemented risk adjustment. The state has a Risk Adjuster Board that oversees the process that redistributes revenue based on individuals’ risk.
As states look for ways to mitigate adverse selection, both through Exchange legislation and through other policies, the following resources may be useful:

• The National Association of Insurance Commissioners (NAIC) has recently released a draft white paper on adverse selection related to the Exchange and policy options for states.
• The National Academy of Social Insurance’s Exchange toolkit includes a discussion of adverse selection and its potential causes related to the Exchange.

Does your state have resources related to mitigating adverse selection? Please share them with us and other states by posting them on your state page at State Refor(u)m. To engage in a cross-state discussion about this milestone, visit State Refor(u)m’s national discussion page.