The Los Angeles Times published an editorial today about the growing consensus among health insurers over the need for universal coverage. While some might find this puzzling, there are sound insurance principles that support the broadest possible coverage.
This interview with Bruce Pyenson offers a primer on adverse selection, a topic germane to the question of broad coverage.
Q: How do you define adverse selection?
Bruce Pyenson: Adverse selection describes a situation where an insurer enrolls an unexpectedly higher concentration of less healthy individuals. Of course, the idea of insurance means the insurer will lose money on some people and make money on others. But people, like insurers, naturally make choices that maximize their own financial interests, and certain insurance product characteristics and market conditions may create situations that result in a greater concentration of less healthy (or more expensive) individuals covered under an insurance policy. In its most severe form, adverse selection is the insurance equivalent of a run on a bank.
If this seems unclear, consider the 80/20 rule. Something close to the 80/20 rule applies to healthcare—about 20% of the people generate about 80% of the cost. Adverse selection can happen because not all of us are average from a health cost perspective; as a matter of fact, almost none of us are average. Most healthcare costs come from relatively few people. In any year, the people who are low cost may not feel they need good coverage, if any at all. The people who are high cost really need the financial protection of coverage.
Guaranteed issue, Reform, Underwriting, Universal coverage
This weekend, the New York Times reported that healthcare leaders and politicians have been meeting for months to build consensus toward a point of agreement in healthcare reform: a requirement that every American carry health insurance. Will this work? Time will tell. Until then, we offer this interview about potential pitfalls in guaranteed issue as a cautionary tale. The success of any coverage requirement may depend on those who least want coverage.
Most Americans support a guarantee of health coverage, and some states have enacted guaranteed issue, which has implications for insurance markets.
We asked Milliman Principal Jim O’Connor to provide some perspective on this issue.
Q: Guaranteed issue can lead to adverse selection. Why is this?
Jim O’Connor: It’s human nature for people to seek out the best deal they can get. People who are young and healthy typically haven’t used the healthcare system much and are less inclined to seek health insurance coverage, whereas people who are less healthy are more likely to seek out insurance. Unless there’s some kind of screening of health insurance applications and a preexisting condition limitation, people tend to wait until they become sick before actually seeking health insurance. A purely guaranteed issue market, without certain controls, will be selected against because it will attract the sickest—and most expensive—people without attracting healthier—less expensive—populations. This results in adverse selection and spiraling health insurance costs.
Electronic Health Records, Guaranteed issue, Reform, Underwriting, Universal coverage