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BUSINESS OF
MEDICINE
The aCa Exchanges and
adverse Risk Selection
By Dana A. Forgione, Ph.D., CPA, CMA, CFE
The media has given front-page coverage to Aetna, UnitedHealth, prime example is maternity coverage. A young and healthy person
and Humana all dropping out of numerous health insurance ex- can wait until they need coverage for a baby delivery, and then sign-
change markets across the country under the Affordable Care Act up. The insurance covers the medical and hospitalization costs of
(ACA). The emphasis has been on what this means for consumers delivery, and then they can drop the coverage afterward if they want.
in terms of fewer health plan options available and the inevitably Of course that could result in greater complications of delivery if
higher premium costs. These are large, major companies and their there was no pre-natal care, and less healthy babies if there is no fol-
absence from the exchanges will no doubt be felt in many commu- low-up care. And that can be more costly in the long run. But the
nities. They have all reported losing millions of dollars on the ACA health coverage can be obtained and retained for a sufficiently long
health plans. In the case of Aetna, evidently they were proposing to pre- and post-delivery timeframe if the subscriber so desires.
merge with Humana for anticipated business advantages and the
justice department moved to block the merger. As a consequence, Second, the low penalties for not obtaining coverage reduced the
Aetna found other ways to improve their finances, i.e., drop losing negative incentives for young and healthy individuals who delayed
product lines on the ACA exchanges. So why all the reported losses, signing-up. In some cases, cheap, non-ACA compliant health polices
and the consequent withdrawals of major companies from ACA can be purchased and the penalties paid, and the total cost may be
markets? In a nutshell, adverse risk selection. a fraction of the premium cost for a compliant health plan purchased
through an exchange.
The whole concept of insurance is that large pools of subscribers
all pay-in premiums, and benefits are paid-out to those with allow- Third, it’s just a hard sell. What we are asking our young and
able claims. That diversifies risk across a large population, and helps healthy citizens to do is pay premiums higher than what they need
make premiums affordable to those in need. Essentially, those who for themselves, in order to subsidize the costs of older sicker people.
never make a claim subsidize those who do make claims. A fair and It’s a noble request, but we are asking this at a time when we are
judicious claims management process is what keeps the system hon- dropping from about five workers per retiree today, down to 2.3
est and efficient. And any given subscriber never knows when they workers per retiree by 2030. That means they will have less than half
will be the one who needs to make a claim in the future. So it’s a the relative, collective earning power than their parents have today.
reasonable plan, and a noble mission. When the ACA was devel- And we are leaving them with $156 trillion of obligations to pay off
oped, it was estimated that 40 percent of the subscribers needed to — which is nearly twice the entire wealth of the United States. Our
be young and healthy so their premiums would subsidize the claims Medicare and Social Security obligations alone are five-times the na-
of older and sicker subscribers. However, several factors hindered tional debt. Does it surprise anyone that we have never obtained
that from materializing, resulting in adverse risk selection. more than about 25 percent young and healthy subscribers to ACA
health plans?
First, the guaranteed insurability and elimination of pre-existing
condition exclusions removed the positive incentive for young and So we have a major shortfall. The folks who signed-up are pre-
healthy individuals to subscribe now. They can save money by pay- dominantly the older and sicker individuals who need the coverage.
ing just the penalties now, and if they get sick or injured in the fu- That’s good. But with not enough healthy people signing-up, that
ture, they can always sign-up for coverage and pay the premiums. A means costs are not being subsidized as planned, and premiums are
going to have to go up. And that’s what we’ve been seeing. All across
34 San Antonio Medicine • October 2016
