One key ACA measure to mitigate adverse selection is as follows. Those who offer insurance on the exchanges must treat all their customers in that state as one risk pool and must offer silver and gold plans -- the middle options in a spectrum that runs from bronze to platinum. If "young invincibles" choose bronze plans, their choices won't affect pricing in more expensive plans, which may be more attractive to older and sicker customers.
A continued risk is posed, however, by the ongoing existence of an individual market outside the exchanges, where insurers may still sell cheap high-deductible plans that appeal to healthy young people, albeit subject to many if not all of the same rules governing plans offered in the exchanges. In yesterday's New York Times, Eduardo Porter outlined that risk:
In some states, big insurers have chosen not to participate in exchanges to avoid their strictures. On the outside, they could still sell cheap plans to skim off the healthy and avoid a rule that insurers on the exchanges must also offer more generous silver and gold plans.It should be noted, though, that a large majority of uninsured young adults who will be wooed by the exchanges will be eligible for premium subsidies, which are not available outside the exchanges.
The NAIC report also suggests, however -- without ever considering the possibility -- that the exchanges may be vulnerable to sabotage by GOP state governments. That's because many of the rules governing insurer conduct inside and outside the exchanges are in the hands of state officials. The NAIC report outlines various measures by which state officials can reduce the risk of adverse selection -- ah, the innocence of 2011! Think how easily these measures (a selection from the NAIC report) can be reverse engineered to reduce the likelihood that the exchanges will function as planned (my italics to emphasize sabotage opportunities):
Market Participation Rules
The most important thing the states can do is to help facilitate a “level playing field ”between participants inside and outside of the Exchange. The ACA does not require insurers to participate in the Exchange; and plans offered by insurers outside the Exchange do not have to meet all of the same Exchange plan standards. The states may establish stronger requirements.
Allowing some variance between the marketplaces allows insurers to design and innovate plans in order to meet consumer needs. However, the more choices a market provides, the greater the opportunity for adverse selection, either directly or indirectly...The states might consider a number of policy options to address these challenges. For example, insurers could be required to operate in both markets and/or be compelled to offer products at certain levels in order to operate in a particular market. The states might require plans sold outside the Exchange to meet the same standards as those offered inside the Exchange
Qualified Health Plan Designation
The ACA identifies minimum requirements that all plans will need to meet beginning in 2014, regardless of whether they are sold inside the Exchange or in the outside market. In order to be certified as a qualified health plan and sold through the Exchange, a plan must also meet additional federal requirements, and possibly additional state requirements. This could make these plans more expensive than plans offered outside of the Exchange and drive enrollment away from the Exchange. Additional requirements might also hinder competition and/or inhibit new insurers from entering a state’s Exchange or health insurance marketplace. State policymakers should consider this dynamic when further defining a qualified health plan and determining what plans must do to sell their products, both inside and outside of the Exchange.
The compensation structure for producers and navigators (a new consumer assistance program established under §1311 of the ACA) inside and outside of the Exchange could have a significant effect on the market. The states should consider the effect of different commission structures inside and outside the Exchange and how that could impact the market. The effects could vary between the individual and small group markets. The states might choose to minimize these effects by regulating how compensation is structured inside and outside the Exchange, including consideration of whether navigators should be salaried employees of the Exchange.
Exchange Administrative Fees
A state Exchange must be financially self-sufficient beginning in 2015. The states have flexibility in determining which mechanisms they want to use. If the addition of administrative fees increases the cost of coverage and exists only on Exchange-offered plans, consumers might be more inclined to purchase from the outside market. To ensure the financial sustainability of the Exchange, the states will need to enroll enough participants to make the operations of the Exchange worthwhile. The basic principle of a level playing field applies here; i.e., if a state decides to charge an administrative fee to cover the costs of the Exchange, it should also consider charging the same fee on products sold outside the Exchange. This would ensure that neither market would have an advantage over the other and broaden the assessed population, thus making the fees lower overall.
Other ConsiderationsOf course, most GOP-controlled states have declined to establish their own exchanges, ceding that role to the federal government. And it might be a bridge too far politically, even for today's GOP, to accept control of the exchanges and then design them to fail, for example by adding expensive additional coverage mandates inside the exchanges while exempting plans offered outside, or by charging insurers large administrative fees inside the exchanges but not outside. It might be hard not to get blamed politically for designing a malfunctioning boondoggle, especially when an analogous program is flourishing in the state next door.
If insurers are allowed under federal regulations to sell coverage to individuals and small groups outside of the individual or small group markets, as defined by the ACA, through non-traditional plans, including association, trust, union or self-insured plans, among others, significant risk of adverse selection could result. State policymakers will need to consider the availability of these other health insurance products in their individual states and how these products interact with other traditional plans offered in the non-Exchange market, as well as these products offered within the Exchange. The states should evaluate their health insurance markets with respect to these products and take steps necessary to mitigate any potential adverse selection, while being careful to avoid unnecessary disruptions in coverage. This could result in regulatory changes for association, union, trust and self-insured plans based on the unique needs within each state.
Those who have refused to administer their own exchanges, however, still have the option of tilting the playing field toward insurance offered on the outside -- e.g., simply by allowing insurers to offer insurance outside the exchanges while abstaining from participating within them, or by loosening the coverage rules outside the exchanges to the fullest extent allowed by the ACA, or by allowing brokers to win larger commissions by selling outside the exchanges rather than within.
I imagine that GOP state officials are working diligently to undermine the ACA in just these ways.