1. Limiting Adverse Selection and Ensuring the Viability of the New Health Insurance Exchanges Edwin Park Center on Budget and Policy Priorities From Vision to Reality: State Strategies for Health Reform Implementation November 11, 2010

2. Occurs when different risks enroll in different health insurance arrangements. Can occur between plans or between a pool and those who remain outside a pool. Drives up premiums, which could cause more healthy people to leave that plan or pool. That could lead to a death spiral and cause the plan or pool to fail. Risk selection is a key competitive strategy for insurers in todays markets. What Is Adverse Selection?

3. Not a theoretical risk and has serious consequences. Plenty of real life examples. PacAdvantage small business pool in California. FEHBP and Harvard University. Healthy Indiana. Prior Experience with Adverse Selection

4. Existing individual and small group markets are left in place but same rules do not apply inside and outside the exchanges. Standards for qualified health plans only for exchange coverage: provider network adequacy, essential community providers, health care quality reporting, grievance procedures, marketing practices and benefit design, and any other federal requirements. Insurers are required to offer Silver and Gold plans inside the exchange but not in outside markets. Part I: Adverse Selection Risks with the Outside Markets

5. Health reform includes a number of key provisions that should help protect against the risk of adverse selection but likely to be inadequate. Premium credits and small business credits just for exchange coverage. New insurance market reforms: uniform premium rating rules and benefit standards (essential benefits and actuarial value tiers). Temporary use of risk corridors and reinsurance (3 years). Set same premium for same plan irrespective of market. Risk adjustment and single risk pool requirement. Elements Protecting Against Adverse Selection

6. Risk adjustment is essential but not likely to work that well in practice. Idea is for plans with healthier enrollees to reimburse plans with sicker- than-average enrollees. Tends to overpredict costs among healthy groups and underpredicts costs of the sick. Lack of data and experience with the individual and small group populations. Gaming and upcoding as seen in Medicare Advantage. Risk Adjustment Is Imperfect

7. Application of risk pooling requirement is limited and full compliance will be hard to achieve. Idea is that insurers will base premiums on the patient mix of all their plans inside and outside the exchange, not on each plans individual enrollees. No requirement that insurers sell products both inside and outside the exchanges and therefore pool across markets. Difficult to enforce. Single Risk Pool Requirement Would Have Limited Benefits

8. Affordable Care Act explicitly provides states significant flexibility in how they structure the exchanges. Examples: governance, merged exchanges, eligibility determination, etc. BUT states always retain authority over their individual and small group markets. Can go beyond what Affordable Care Act requires. States can additional steps to limit adverse selection, as outlined in August CBPP analysis. State Options In Designing Exchanges and Market Reforms

9. Create a level playing field. Apply same rules for qualified plans inside the exchange to plans outside the exchange. Irrespective of market, plans have to meet same marketing requirements, provider network adequacy, and quality reporting standards, etc. Applying the Same Rules Inside and Outside

10. Could require all insurers operating in the state to offer inside and outside the exchanges as well as offer the same products. Inconsistent with active purchaser model for exchange. If active purchaser exchange is viable: Require insurers outside the exchange to offer products in at least the Silver and Gold coverage levels as they do inside the exchange. Bar insurers from only offering Bronze or catastrophic plans outside. Included in Californias exchange law. Same Products Inside and Outside the Exchanges

11. Explicit state option to merge exchanges. Expands enrollment to make it more likely there is a well-balanced risk pool. Could promote greater competition and lower prices, which would make exchanges more attractive and thus more likely to be viable. May require a transition period to allow various market reforms to take effect. States could eliminate outside markets entirely but immigrant access issue. Merge Individual and Small Group Markets Over Time

12. Requires careful oversight. Auditing data used in risk adjustment and to demonstrate compliance with risk pooling requirement. Requires costly use of actuaries. Compare to information gleaned from other procedures like rate review. Feedback to HHS to help make ongoing modifications as necessary. Penalties including exclusion from market for ongoing failure to provide accurate data or intentionally provide false data. Ensure that affiliates not used to get around single risk pool requirement. Effective Enforcement of Risk Adjustment and Single Risk Pool

13. Exchanges must be self-sufficient by 2015. Expected to be financed by assessments on insurers, which will likely be passed onto enrollees in the form of higher premiums. Exchanges will have substantial costs relative to the outside markets, such as determining eligibility for the credits and other required functions. Higher premium costs may not be offset by other administrative savings. Assessments could instead be applied to all insurers operating inside and outside the exchange (i.e., all covered lives in al markets). Equalize Premium Assessments

14. States can ensure that commissions for agents and brokers to ensure no financial incentives for steering healthy people outside the exchange or to certain plans. Does not mean that commissions have to be the same. If exchange coverage takes on administrative duties previously delegated by insurers to agents and brokers, should have lower commissions and thus premiums (which would make exchanges more competitive). Reviewing Commissions for Agents and Brokers

15. States typically let insurers set the geographic areas they use to set premiums. Should be reasonably set to reflect real differences in spending, utilization, and insurer and provider competition. Premium rating areas should be the same inside and outside the exchanges. As large as possible to avoid opportunities for redlining-type risk selection strategies. Setting Premium Rating Areas

16. Adverse selection also is likely to occur between various plans within the exchange as well. Between tiers: less generous Bronze plans are likely to be more attractive to low-cost healthy populations and more generous Gold and Platinum plans most attractive to the healthy. Like HSAs vs. more comprehensive PPOs and HMOs. Between plans within the same actuarial value tier: differences in benefit design and provider networks. Like in Medicare Advantage. Part II: Adverse Selection Among Plans Inside Exchange

17. States could further limit the variation in benefits across plans in the same tier and between tiers. The limits of actuarial value. Try to rely more on cost-sharing differences than differences in scope of benefits. Harder for insurers to design benefits in ways to attract the healthy. Example of Massachusetts. Easier for consumers to make informed choices. Would also make it easier to provide cost-sharing reductions. Greater Standardization of Benefits

18. All exchange plans are subject to federal marketing rules. They also are prohibited from employing marketing practices or benefit designs that have the effect of discouraging enrollment by the sick. Example of Medicare Advantage. Carefully review marketing materials and policies and agent/broker behavior. Examine year-to-year changes in benefit design, particularly for benefits used by higher-cost individuals, and track any changes in patient mix. Enforcement of Marketing and Benefit Design Standards

19. Political context and current state of regulatory regime will determine whether a state can institute these actions to limit the risk of adverse selection. Governor and legislature. Insurance Commissioners. Influence of insurers and agents/brokers. Long-standing bipartisan interest in exchanges. Small businesses. Addressing adverse selection can be a non-partisan issue. Feasibility at the State Level