Vedant Near

2014-15 JOHN NEAR GRANT Recipient Increasing the Efficiency of U.S. Healthcare: Addressing Adverse Selection in the Health Insurance Market through the Patient Protection and Affordable Care Act Vedant Thyagaraj, Class of 2015

INCREASING THE EFFICIENCY OF UNITED STATES HEALTHCARE: ADDRESSING ADVERSE SELECTION IN THE HEALTH INSURANCE MARKET THROUGH THE PATIENT PROTECTION AND AFFORDABLE CARE ACT

Vedant Thyagaraj John Near Scholar Mentors: Mr. Samuel Lepler, Mrs. Lauri Vaughan April 10, 2015

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United States Health Care Overview Over the past decade, the United States (U.S.) has spent approximately 16-20% of its annual Gross Domestic Product (GDP) on healthcare and its associated costs. For the 2014 fiscal year, in specific, approximately 18% of the U.S. GDP was allocated to healthcare.1 In spite of this, healthcare in the U.S. has not been operating efficiently. For example, although the U.S. leads in expenditure per capita on health care products and services, the percentage amount the country spends on medical Research & Development (R&D) over the past decade has consistently been declining.2 Additionally, many resources are squandered on inefficient care; over $800 billion is spent annually on medical treatment and administrative services that yield no true value.3 Such inefficiencies have detracted from the quality of the U.S. health care system. A recent article in The Huffington Post, based on a study conducted by McGill University and UCLA Fielding School of Public Health, found that among twenty-seven industrialized countries, US healthcare ranked 22nd in terms of life expectancy.4 Among other drawbacks, the same study found that a $100 increase in health care premiums per capita raises U.S. life expectancy by approximately only half a month, compared to four months in other industrialized countries.5 Such issues lend perspective to the current state of U.S. healthcare and warrant change throughout the entire industry.

The primary cause for rising medical and insurance premiums over the past decade has been a lack of productive and allocative efficiency in the market for healthcare. Excessive administrative costs, medical delivery fragmentation, as well as financial and risk selection have resulted in a market structure where every marginal dollar does not buy the maximum amount of health care value possible.6,7,8 In terms of

Thyagaraj allocative efficiency, the large input prices, risk of moral hazard, and implementation of unproven, yet costly, medical technologies have led to a market where healthcare is not offered at a price that is equal to marginal cost.9,10 Health Insurance Market Failures For the majority of Americans, health insurance has been a priority to ensure financial security against any potential ailments. However, insurance premiums have been increasing in recent years due to several economic failures in the market for health insurance. First, the advent of greater provider collusion has contributed to increased premiums; The American College of Cardiology recently reported that the “number of doctors working for hospitals has more than tripled in the past five years.”11 More importantly, however, information asymmetry between insurance companies and customers has resulted in premiums that are neither productively nor allocatively efficient.12,13 Asymmetric information, in this context, occurs at two different levels.

First, information asymmetry occurs between patients and insurance providers when the former knows more about their medical status and expected treatment requirements compared to the latter. This issue has led to providers not being able to accurately price premiums, as they are not fully aware of their risk pool and customer liabilities. Second, information asymmetry also occurs between patients and doctors. Defensive medicine, where doctors prescribe medical treatments that are not necessarily in the patient’s best interest but protect the doctor from potential lawsuits, has also become more common and has resulted in increased medical costs, which indirectly raises insurance premiums.14,15 The flip-side of this argument is physician-induced demand; doctors and other medical practitioners will prescribe treatments for patients that are superfluous and

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unnecessary, in order to increase their own profits.16,17 Along with information asymmetry, the other primary economic failures in the health insurance market include the failure of competition (i.e. the failure of insurance companies to produce comparable and competing plans) and incomplete markets (a market situation where “consumers would be willing to pay more than the cost of a good or service but it is not provided”).18 The information asymmetry problem is specifically segmented into two distinct market failures: moral hazard and adverse selection.19 The remainder of this paper will focus on adverse selection.

Adverse Selection In the Health Insurance Market Adverse selection has affected the health insurance market for many decades. As no prior economic solution has succeeded, this market failure has been elevated to the most important health care economic inefficiency in the market for health insurance.20 Adverse selection occurs due to information asymmetry between customers and insurance providers and is typically characterized by high-risk patients increasing insurance premiums so significantly that lower risk customers drop out of the market.21,22 Differential selection, whereby different insurance plans attract varying audiences of differing health levels (a scenario that characterizes current health insurance), can lead to adverse selection when plans do not differ based on their marginal costs.23

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Figure 1. Graphical Representation of Adverse Selection Using An Individual Insurance Plan Source: Einav, Liran, and Amy Finkelstein. "Selection in Insurance Markets: Theory and Empirics in Pictures." J Econ Perspect 25, no. 1 (December 30, 2011): 115-38.

The health insurance market, specifically for each individual insurance plan, consists of individuals who make the decision to purchase that insurance plan or not, while sellers of the insurance plan (insurance providers) only have the power to vary premiums.24 As seen in Figure 1, the demand curve represents the marginal benefit consumers receive from this insurance plan, and hence their willingness to purchase it. According to Einav et al. (2011), “a risk averse individual’s willingness to pay for insurance is the sum of her expected cost and her risk premium.”25 Individuals who classify as high-risk are expected to pay the most for health insurance, while the likelihood of paying a specific premium then varies as a function of an individual’s risk level from that point onwards - hence, the marginal cost curve is downward sloping.26

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The market for used cars, as outlined by Bhattacharya et al. (2014), is a classic example that demonstrates the potential consequences of adverse selection.27 In such a market, buyers have the opportunity to inspect the quality of the car, which diminishes any potential for asymmetric information. However, in a market with information asymmetry, sellers know the exact problems with the car they are trying to sell, while buyers must simply guess and hope that they do not purchase a faulty car. In such a market, cars must sell at the same price, as buyers view them as identical products.

However, if a seller believes that his car is worth much more than this market value, he will not want to sell. This results in only lower-quality cars being sold, with the highest quality of these low-quality cars having a price P. However, as buyers know that they will only be purchasing cars whose quality is at maximum the value of price P, they will demand a lower price. Once a lower price P’ is determined, the highest-quality cars that were valued at P will be pulled from the market, as their owners value them at more than the new market price P’. This adverse selection spiral continues and eventually results in only the lowest-quality cars being present in the market. Even these cars are not guaranteed to sell, which could lead to the collapse of the entire used car industry.28 The same principles of adverse selection discussed above apply to the health insurance market. When high-risk individuals join an insurance plan seeking medical coverage, the insurance provider compensates for the increased risk by raising premiums.

However, many low-risk individuals, who were previous subscribers to this insurance plan, may find that the new premiums are not justified given their health conditions; in essence, their marginal benefit from the insurance policy does not outweigh the new (and increased) marginal cost.29,30 As a result, these individuals terminate their health

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insurance plans. With an increased risk profile due to a decrease in the number of lowrisk individuals, insurance companies must raise premiums further to compensate for the additional risk. This only results in more low-risk individuals eliminating insurance plans, which causes prices to rise, leading more low-risk individuals to forgo health insurance, etc. – this deadly selection spiral is an inevitable outcome of adverse selection that could eventually “lead to the collapse of the insurance pooling mechanism.”31 A precedent featuring adverse selection and its harmful consequences occurred in the 1990s at Harvard University and eventually led to the elimination of Preferred Provider Organizations (PPOs) at the university in 1997.32 Harvard initially offered two plans: 1) a comprehensive, but more expensive, PPO plan through Blue Shield, and 2) an inexpensive Health Maintenance Organization (HMO) plan that emphasized costsharing.33 The Blue Shield plan was initially $500 more than the cost of the HMO plan in 1992, but subscribers to this Blue Shield plan received a financial subsidy from Harvard.34 In the mid 1990s, Harvard experienced a budget deficit and cut costs to conserve resources. To optimize costs, the institution substantially reduced its subsidy for the PPO option and enforced an “equal-contribution” policy.35,36 As a result, the cost difference between the PPO and the HMO options in 1995 was $731 and by 1996 was $1,414.37 Due to the increasing premium rates for the PPO plan, many healthy individuals (specifically younger individuals) switched to the low-cost HMO plan. To compensate for the increased risk pool, as the percentage of healthy individuals enrolled to offset high-risk individuals had declined, PPO premiums increased.38 With these significant price increases, more and more individuals dropped out of the PPO plan, leading PPO

Thyagaraj premiums to increase even more. This adverse selection spiral eventually resulted in the discontinuation of the PPO at Harvard in 1997.39

Figure 2. Harvard PPO vs HMO Premium Charges Source: Cutler, David M., and Richard J. Zeckhauser. "Adverse Selection in Health Insurance." National Bureau of Economic Research, no. 6107 (July 1997).

Direct Consequences of Adverse Selection As mentioned above, adverse selection prevents the efficient functioning of a market by steering it significantly away from equilibrium conditions. In the health insurance market, adverse selection can: 1) Significantly impact insurance premiums, 2) Lead to the failure of state exchange marketplaces, 3) Increase risk selection, 4) Propagate plan misallocation among customers, and 5) Promote inefficient Risk-Sharing and Risk-Spreading.

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Premium Increases and Limited Coverage As mentioned above, adverse selection directly results in premium increases as insurance companies must be compensated for their greater risk profile. Adverse selection also leads to premiums not being based on the marginal cost of an additional subscriber, resulting in ineffective markets.40 Should those who choose to forgo health insurance find themselves in medical trouble in the future, treatment options will be very costly.41 In fact, CNBC reported in June 2013 that expenditures related to medical treatment were the primary reason for bankruptcies.42 Furthermore, with services such as the Emergency Room (ER) open to anyone who needs immediate treatment, usage rates have “increased at twice the rate of the U.S. population,” significantly increasing the effects of the FreeRider problem.43 The fact that health care equality (specifically access to healthcare) is classified as a public good, whereby it is non-rival and non-excludable, further worsens the Free-Rider problem and raises expenses in the aggregate health insurance market.44 For example, if an individual without insurance were to be badly injured and need ER services urgently, it would be unethical to stop him or her from using those facilities. Due to this Free-Rider problem, the only way ER services can function beyond their optimal capacity and remain in business is to increase premiums for paying customers.45,46 Thus, adverse selection, and even the general American health care infrastructure, makes medical care more expensive for paying customers through increased premiums.

As a result of these increased insurance expenses, insurance providers could be motivated to limit the extent of their provider network.47,48 Access to subject-matter experts and expensive medical procedures could be significantly reduced in order to conserve prices.49,50 With many insurance companies operating against each other in the

Thyagaraj 10 market, competition for low-risk individuals (which is proportional to lower premiums for insurance plans) would increase and therefore further push insurance providers to offer inexpensive and general medical services.51,52 Such actions could significantly damage the medical industry and shift emphasis towards general over-specialized healthcare (which would eventually lead to progressive decline for the industry).53 Adverse selection could also threaten the viability of high-end hospitals that offer individualized treatment.54 Failure of State Exchange Marketplaces The Patient Protection and Affordable Care Act (PPACA) contains a provision creating new state exchange marketplaces whose goal is to provide health insurance packages, effectively competing with private health insurance companies.55,56 However, even these newly-established state exchange marketplaces have the potential to fail if the adverse selection problem dramatically increases to the point where only high-risk individuals enroll in these state exchange marketplaces and more low-risk individuals enroll in private insurance plans.57 As state exchange marketplaces are required to offer a silver plan and a gold plan (which possess a 70% and 80% actuarial value respectively), while private insurance companies do not have such a requirement, private insurance providers could offer cheaper, more general insurance plans and therefore attract the majority of the low-risk market.58 This greater concentration of higher-risk individuals in state exchange marketplaces could increase premiums significantly, and on a much larger scale than the Harvard precedent, contribute to the failure of these exchanges.59 Additionally, if the U.S. Department of Health and Human Services, which “protect[s] the health of all Americans and provid[es] essential human services,” offers a more generous provider network and

Thyagaraj 11 increased access to specialists from which customers can choose. Compared to private insurance companies, more high-risk individuals would be likely to enroll in state exchange marketplaces.60 Those who do not anticipate needing any significant medical aid in the near future would subscribe to the more limited, but more cost-effective, plans of private insurance companies, effectively signaling the demise of state exchange marketplaces.61,62 Increased Risk Selection Adverse selection can result in insurance providers indirectly attracting healthier audiences and distinguishing their customers into different groups based on medical disposition.63,64 Sarah Lueck, a Senior Policy Analyst at the Center on Budget and Policy Priorities, writes that “provider networks, utilization review practices, and prescription drug formularies are likely to differ across plans, and insurers could try to structure these features to attract healthier people and deter enrollment by those with higher costs.”65 Such risk selection most heavily affects individual and small insurance markets, given their sparsely populated insurance pools.66 The effects of risk selection are clear: low-risk individuals face lower premiums as they belong to their own low-risk tier, while high-risk individuals face excessive premiums and can sometimes even be denied coverage.67 Linda J. Blumberg, an Urban Institute's Health Policy Center senior fellow, notes that with insurance providers being able to offer selective coverage based on health status, low-risk individuals can receive plans with much greater actuarial values than those provided for high-risk individuals, the latter of whom are truly in need of greater treatment and coverage.68 As a result, many market inefficiencies arise due to risk selection.

Thyagaraj 12 Losses From Plan Misallocation Flawed “benefit-cost” analysis is another consequence of adverse selection.69 The resulting effects of erroneous plan selection will be discussed in the context of the example provided by Cutler et al. (1998) below.

Table 1. Costs of Two Different Insurance Options For Low and High Risk Groups Source: Garber, Alan M., David M. Cutler, and Richard J. Zeckhauser. "Frontiers in Health Policy Research." National Bureau of Economic Research 1 (January 1998).

The theoretical, efficient outcome from this data should include the low-risk patients purchasing the moderate plan costing $40, as the benefit difference ($15) is lower than the excess cost of the generous plan ($20). The high-risk individuals, on the other hand, should purchase the generous plan option because the benefit difference ($40) outweighs the excess cost of the generous plan ($30). If information asymmetry were to persist, as in adverse selection, and insurance providers have no way of determining the risk profiles of their customers, the only two plans that would remain feasible would be the moderate plan costing $40 and the generous plan costing $100. In this scenario, those who are high-risk would transition to the moderate plan as their benefit difference between the moderate and generous plans ($40) does not outweigh the excess cost of the generous plan ($60). As a result, high-risk individuals would also join the moderate plan, driving

Thyagaraj 13 moderate plan premiums up and starting a deadly selection spiral for this plan.70 Another point to note is that in the example above, an equilibrium cannot exist - in all given scenarios, price will never be equal to marginal cost for each plan individually. Thus, adverse selection can result in an incorrect “benefit-cost” analysis, which leads high-risk individuals to join low-risk individuals in a moderate insurance plan, instead of remaining in a generous plan, which would be best for all parties involved.71 Inefficient Risk-Sharing and Risk-Spreading Additionally, one of the most challenging consequences of adverse selection is the “less than optimal risk spreading,” due to low-risk patients dropping out of insurance populations.72 The direct impacts of this are manifested in premium increases, greater instability in insurance plans, and an insurance customer based largely made up of sick individuals.73 Theoretical Prevention of Adverse Selection Given the severity of the adverse selection issue, many theoretical models have been developed in an attempt to reduce, or even prevent, the effects of this market failure.

First, universal insurance coverage, instituted by the government, could help reduce adverse selection by maintaining a balance between high-risk and low-risk individuals in insurance population pools.74 Purchasing insurance along the fair-odds line would be the most economically productive as can be seen in Figure 3.75

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Figure 3. Purchase of Health Insurance Along Fair‐Odds Line Most Efficient Source: Autor, David. "Adverse Selection, Risk Aversion and Insurance Markets."

Massachusetts Institute of Technology, November 21, 2010.

Such a state would result in a pooling equilibrium, which Bhattacharya et al. (2014) define to be a “contract that attracts both robust and frail customers and simultaneously satisfies the equilibrium conditions.”76,77 If the insurance plan were to lie to the left of the fair-odds line (the dashed middle line in Figure 4 below), the firm would make significant profits by insuring more lowrisk (or “robust”) individuals.78,79 The profits made by the insurance company would attract other firms to enter the market, reducing profits for an individual firm, and eventually restore it back to the fair-odds line.80,81 If the insurance plan was to lie to the right of the fair-odds line, there would be a significant proportion of high-risk individuals being insured, resulting in a loss of profits and revenue for the provider.82,83 This scenario would eventually lead to many firms exiting the market and therefore restore normal profits for the firms remaining in the market. As can be seen, optimal insurance coverage

Thyagaraj 15 occurs along the fair-odds line, where there is an equal balance between low-risk and high-risk individuals.84,85 According to Jay Bhatacharya et al. (2014), many health insurance markets that have successfully reduced, if not prevented, adverse selection have focused on enforcing a mandate of some sort that results in insurance being purchased along the fair-odds line.86

Figure 4. Purchase of Health Insurance Along Fair Odds Line Results In Equilibrium & Normal Profit Source: Autor, David. "Adverse Selection, Risk Aversion and Insurance Markets."

Massachusetts Institute of Technology, November 21, 2010.

Another theoretical solution to the issue of adverse selection involves customers signing up for lifetime insurance contracts at a young age, before information asymmetry becomes evident (i.e. before young individuals begin to discover or develop their illnesses and infirmities). This uncertainty in their futures would push healthy, young individuals, who are typically the first to drop out of insurance coverage due to premium increases, to subscribe to insurance plans. An interesting point Jay Bhatacharya et al.

Thyagaraj 16 (2014) make is that by virtue of knowing the premiums that they will pay in the future, regardless of their medical status, these young individuals will be insured “against both health risk and the risk of becoming frail.” Lifetime insurance contracts would therefore not only provide benefit to low-risk individuals, but more importantly keep them in the insurance market to offset the costs associated with high-risk individuals. As a result, lifetime insurance contracts possess significant potential to reduce insurance premiums.87 In addition to lifetime insurance contracts, the guaranteed renewable insurance policy, which has been gaining prominence in recent years, represents another theoretical health insurance market structure to control adverse selection.88,89 In such a market structure, premium rates are significantly higher when individuals are younger and do not have a clear idea about their future health conditions. As these individuals age, their premiums decrease (as they paid a portion of future premiums during their younger years). In this market strategy, individuals pay excessively when they are young in case they face any medical infirmities when they age (a factor they cannot predict at a young age, resulting in a direct reduction of information asymmetry).90 Although individuals are not required to continue their insurance contracts, once they have paid the high premium costs during their young age, it makes sense for them to stay, as they have effectively paid for most of their medical care and will only have to pay decreasing premiums.91,92 As a result, guaranteed renewable contracts have been shown to attract customers from the insurance market for individuals and significantly increase insurance coverage rates.93 Having increased insurance coverage rates would increase the proportion of low-risk individuals across insurance plans and directly reduce adverse selection by reducing premiums. While a common argument against guaranteed renewable insurance policies is

Thyagaraj 17 to delay coverage, consumers do not have an incentive to wait until they face health issues to subscribe to this type of insurance policy as they are paying for their own “wellbeing” ahead of time.94 If an individual only starts purchasing health insurance after the onset of a medical issue, he or she will not have access to the same facilities and treatment options that another individual who has been paying for insurance from a young age will have.95 Furthermore, that individual will not have the “financial protection” against increased insurance costs should he or she suddenly face medical ailments, according to Wharton Professor of Health Care Management Mark V. Pauly.96 As a result, guaranteed renewable insurance policies represent a novel way to control adverse selection by emphasizing expanded treatment options and “financial protection” for individuals who pay a greater amount during their early years to safeguard against potential ailments in the future.97 A final mechanism for controlling adverse selection involves insurance companies understanding the demographics of the population they are attracting for their product.98 To do this, notes University of Notre Dame Professor of Economics Bill Evans, providers could measure “correlates of health care use… such as age, race, sex, location, BMI, [and] smoking status.”99 Evans adds that varying insurance plans in terms of premiums, deductibles, and co-pays may also help distinguish between healthy and unhealthy individuals, thus reducing information asymmetry.100 Although not a comprehensive solution by itself, other immediate and external factors, as outlined by Bhattacharya et al. (2014), can affect the rate and impact of adverse selection in the health insurance market. If individuals do not accurately understand their risk profiles or, if they do, do not actively seek medical treatment or

Thyagaraj 18 insurance based upon this knowledge, insurance population pools will not be altered and individuals will continue to purchase insurance to the best of their ability.101 Adverse selection could also potentially be reduced if insurance providers have mechanisms to anticipate the medical risk of their clients as well as their likelihood of needing a specific type of treatment or medical intervention in the near future.102 In terms of external influences, risk aversion leads to a greater demand for health insurance and results in more individuals entering the market; high-risk individuals, however, are more likely to abstain from the market due to their comparatively lower risk aversion.103 As a result, insurance providers have a better-balanced risk profile, which should theoretically prevent premiums increases. Additionally, increased cognitive capacity results in greater health insurance purchase because individuals more thoroughly comprehend the financial and health risks without it.104 In a different scenario, if low-risk individuals have a greater likelihood of buying health insurance over high-risk individuals, advantageous selection could result.105,106

Figure 5. Graphical Representation of Advantageous Selection Source: Einav, Liran, and Amy Finkelstein. "Selection in Insurance Markets: Theory and Empirics in Pictures." J Econ Perspect 25, no. 1 (December 30, 2011): 115-38.

Thyagaraj 19 Advantageous selection stems from the difference in medical and health care preferences among individuals and exerts the opposite effect of adverse selection. In specific, advantageous selection possesses a constantly increasing Marginal Cost curve (upward sloping) as depicted in Figure 5. As the Marginal Cost and Average Cost (AC) curves are under the Demand curve (Figure 5), Marginal Revenue > Marginal Cost at every point below Qeff (the efficient quantity) and MR = MC at Qeff. Therefore, at the equilibrium quantity Qeff, everyone in the health insurance market would receive coverage.107 The Ideal Legislation To Combat Adverse Selection To adequately address adverse selection and its associated market failures, an effective health care model needs to: 1) Institute an insurance mandate to spread risk and eliminate the prospect of a selection spiral, 2) Implement risk adj.t.ment policies, and 3) Increase competition throughout the health insurance market, to maintain or reduce costs for consumers. The recent Patient Protection and Affordable Care Act seems to meet these requirements, giving it solid theoretical potential to defeat the health insurance market’s greatest economic failure.

Patient Protection and Affordable Care Act Reduces Adverse Selection When it was incorporated into U.S. federal law on March 23, 2010, the underlying goal of the Patient Protection and Affordable Care Act (PPACA), also known as Obamacare, was to increase the “quality of care” and coverage of health insurance in the U.S., while preserving, if not lowering, prices.108,109 Through increased health insurance coverage and reduced health care costs, the PPACA is expected to provide insurance to thirty million uninsured Americans.110,111,112 A core component of the PPACA is Guaranteed Issue, the notion that health insurance cannot be denied based on

Thyagaraj 20 previous medical history (prior to the PPACA, explicit discrimination among clients by insurance providers was a significant problem).113 In addition, the PPACA contains provisions to: 1) Construct online tools that can help with insurance selection, 2) Design a program allowing easy access to efficient healthcare and promote research in health care delivery, 3) Establish an educational campaign centered on healthcare funded by The Secretary of Health and Human Services (HHS), 4) Help patients understand their treatment and insurance options more comprehensively, and 5) Improve the current standard of medical intervention.114 The Individual Mandate The PPACA mandates that all Americans, regardless of socioeconomic status, purchase health insurance or face a financial penalty.115 While insurance plans might vary across providers, individuals must, at the least, possess Minimum Essential Coverage, or “The type of coverage an individual needs to have to meet the individual responsibility requirement under the Affordable Care Act” according to HealthCare.gov.116 The mandate does not apply for those within 100-400% percent of the federal poverty line or those who identify with a religion that does not acknowledge health insurance, are illegal immigrants, are “incarcerated,” identify with an Indian tribe, or spend more than 8% of their income on health insurance after all rebates and benefits.117 However, the government will provide subsidies for the individuals mentioned above so that health insurance is not out of their reach.118 The individual mandate component of the PPACA directly counters adverse selection and its associated selection spiral by forming a stable population pool whose risk is balanced for insurance providers. First, the mandate allows every individual to

Thyagaraj 21 purchase insurance, a direct solution to one of the problems adverse selection causes.119 Even if all individuals wanted health insurance and would pay above the equilibrium price to obtain it, the market would not be able to provide insurance for everyone.120 Using data from the Massachusetts Health Care Reform Act, Hackmann et al. (2013) concluded that the individual mandate plays a key role in significantly reducing insurance premiums and the average cost per individual.121 This is partly because the individual mandate (specifically fear of the fine) moves the demand curve (for health insurance) to the right by the amount of the fine, as can be seen in Figure 6 below.122

Figure 6. Individual Mandate Increases the Demand For Insurance By Penalty Amount Source: Hackmann, Martin B., Jonathan T. Kolstad, and Amanda E. Kowalski.

"Adverse Selection and an Individual Mandate: When Theory Meets Practice∗." The National Bureau of Economic Research, September 2, 2014.

Hackmann et al. (2013) also note that an economically efficient penalty would have to “[induce] the level of coverage that would occur without information asymmetries.”123

Thyagaraj 22 Although the PPACA’s penalties range from $95 - $3,600 in the individual market and $285 - $11,000 in the group insurance market, these amounts should theoretically be sufficient to cover the information asymmetry present in the market.124 Without the mandate, aggregate government expenditure on health insurance would increase due to higher premiums and significantly lower profits from non-coverage penalties.125 The PPACA also provides a fluid mechanism to ensure universal coverage: by implementing federally sponsored subsidies, nearly all individuals will be able to purchase health insurance.126 Apart from reducing the effects of the selection spiral, such measures could even destroy the selection spiral - as premiums and costs decrease, more low-risk individuals will join insurance plans, reducing prices even further.127 Furthermore, the mandate also helps curb the free-rider problem for health insurance, given that individuals are required to purchase insurance and cannot simply request emergency medical services whenever necessary at no cost.128 Prior to the institution and enactment of the PPACA in 2014, the state of Massachusetts (MA) had a similar legislation tested in 2006. Similar to that of the PPACA, the goal of the Massachusetts Health Care Reform Act was to have all MA individuals covered with health insurance.129 The Massachusetts Health Care Reform Act instituted an individual mandate that made health insurance for those living in MA compulsory.130 The fine for not subscribing to an insurance plan was half the price of the most inexpensive plan.131 Such a move “increased annual welfare by $355 per person in the individual market, which translates into an overall annual welfare gain of $71 million.”132

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Figure 7. MA Individual Mandate Increased Insurance Adoption by 5.4% In One Year Source: "Massachusetts Health Care Reform: Six Years Later." The Henry J. Kaiser Family Foundation, May 2012.

After the enactment of the mandate, 5.4% more low-risk individuals bought insurance in one fiscal year as can be seen in Figure 7.133 Having more low-risk individuals helped offset the risk associated with high-risk individuals and decreased the prevalence of adverse selection in the MA health insurance market, which ultimately contributed to an “annual welfare gain of 4.1% per person or $51.1 million annually” in MA.134 Establishment of State Exchange Marketplaces The PPACA establishes new state exchange marketplaces, collectively called the Health Insurance Marketplace (HIM), which offer insurance packages for consumers in both the individual and small business markets and allow them to choose the most

Thyagaraj 24 optimal plan.135,136 The HIM is the government’s attempt to compete with private health insurance providers, in order to retain control over industry insurance plans and transition health insurance towards a perfectly competitive market.137 Through such measures, the HIM is expected to decrease premiums for insurance customers.138 All plans that are offered through the HIM must offer both a silver level and gold level plan, which ensures that participating insurance providers cannot risk select for low-risk individuals by only offering lower-coverage plans.139 The ACA contains components to prevent the HIM from only offering more expensive plans, while private insurance companies offer less comprehensive, cheaper plans, through effective risk management strategies and guaranteed issue.140 Furthermore, subsidies for insurance payments will only be offered through the HIM, a strategy to gather a more risk-balanced population.141 To further increase the effectiveness of the HIM and reduce adverse selection, states have the option to only offer insurance through the HIM or create the same regulations for insurance plans offered through the HIM and through private insurance providers.142 Greater Standardization of Health Insurance Plans To reduce the possibility of risk selection, a key component of the PPACA includes the standardization of insurance plans. All insurance plans offered, both through the HIM and private providers (so long as plans are not grandfathered), must include an “essential health benefits package,” a common baseline set of medical services that is determined by the government.143,144 Such standardization of plans increases the uniformity among the various insurance options offered, shifting the health insurance industry towards a more perfectly competitive market and also preventing risk selection.145 With essentially a greater supply of each plan option, premiums should fall

Thyagaraj 25 and simultaneously reduce adverse selection. Standardization of plans would also give consumers greater purchasing power when selecting their insurance plans, as all plans that offer the same packages are no longer allowed to differ in premiums (irrespective of purchase location).146 Given this new regulation, providers will have to offer additional perks and benefits with their insurance plans in order to differentiate themselves from the competition, which directly increases the Marginal Benefit consumers receive from insurance plans, while keeping costs preserved. Additionally, for consumers to better judge insurance plans and make more informed decisions regarding their coverage, plans offered both privately and through the HIM are required to be ranked according to a standardized rating scale.147 To further discourage risk selection, the PPACA also prohibits marketing tactics that encourage such actions.148 Single Risk Pool The PPACA requires that insurance providers, whether selling plans through the HIM or privately, calculate premiums by combining all enrolled customers into a “single risk pool.”149,150 These “single risk pools” would reduce the ability of insurance providers to risk select for low-risk individuals or offer different plans based on medical history, therefore forcing them to maintain a better-balanced risk profile.151 As a result, this wellbalanced population pool would allow for enhanced cost-compensations (low-risk subsidizing the high-risk) and thus help reduce adverse selection. Single-risk pools are also necessary to prevent “reclassification risk,” which Ben Handel, Assistant Professor of Economics at University of California, Berkeley, describes to be the risk of customers facing high premiums in the future after the need for medical treatment in the present.152 Handel et al. (2015) found that if insurance providers can distinguish their population

Thyagaraj 26 pools into separate groups based on medical history, the “welfare cost” of reclassification risk outweighs that of adverse selection by nearly a factor of five.153 Hence, single risk pools not only address adverse selection but also prevent further issues such as reclassification risk.

Risk Prevention and Management The PPACA establishes three main provisions to manage risk: 1) A permanent risk adjustment system, 2) Reinsurance, and 3) Risk Corridors. The goal of these three risk management systems is to force insurance providers to “compete on price and quality and not on the relative health of their risk pools.”154 Such a move would help stabilize premiums and the health insurance market in general.155 The goal of the legislation’s permanent Risk Adjustment system is to reallocate funds to health insurance plans based on the risk profile of its customers, regardless of whether insurance is purchased through the HIM or through private providers.156,157 Because insurance providers are required to maintain an “essential health benefit package,” and lose some degree of flexibility in plan design with the advent of the PPACA, risk adjustment systems are designed to ensure insurance providers are monetized based on their enrollment risk profile.158 An individual risk score is calculated for each individual part of a health insurance plan (based on their medical needs and potential treatment requirements), and the average of all the insurance plan’s individual risk scores will become the plan’s average risk score.159 Insurance plans with lower average risk scores will “make payments into the system, while plans with relatively high average risk scores will receive payments.”160 Because insurance providers are compensated for their risk and have the resources necessary to manage excess risk, risk

Thyagaraj 27 selection should theoretically decrease significantly.161 States can either use the government’s Risk Adjustment system or create their own modeled after the one present in the PPACA.162 Similar to the risk adjustment system described above, reinsurance is a transitory provision of the PPACA that will function from 2014 to 2016 to help reduce the adverse selection-related risk encountered by insurance providers.163 Reinsurance provides financial payments, obtained from the entire health insurance market’s individual and group insurance plans, to insurance plans enrolling high-risk individuals.164 The main goal of reinsurance, which operates through both the HIM and private insurance providers, is to make the individual market for health insurance more efficient by conserving premiums during the period when HIMs are being launched.165,166 According to the American Academy of Actuaries, risk adjustment fails to provide payments for insurance plans with extremely high-risk profiles; reinsurance, on the other hand, is specifically designed for plans that enroll significantly high-risk individuals and can help “mitigate this risk.”167 If an insurance plan’s risk profile exceeds an attachment point, which Greenwood (2014) describes as “the amount that an insurer must incur in claims costs for a single individual before the insurer would become eligible for reinsurance payments,” it will receive funds to handle its excess risk.168 By virtue of its nature and design, reinsurance can reduce risk selection and will also keep premiums from significantly increasing because it allocates funds to plans with high-risk profiles.169 In fact, premiums in the single-buyer market should be reduced by approximately 10-15% due to reinsurance, which significantly outweighs its cost - a 1% increase in aggregate health care premiums.170 Similar to risk adjustment mechanisms, states have the liberty to

Thyagaraj 28 create their own reinsurance protocols or they can simply follow those outlined in the PPACA.171 Risk corridors are another temporary component of the PPACA that are expected to operate from 2014 to 2016.172 Risk corridors focus on pricing.173 Given that the PPACA is extremely new and has only been operating for a year, insurance providers do not have sufficient consumer data that they can statistically analyze to define accurate premiums; risk corridors, as a result, serve as a buffer that can compensate for losses from inefficient or inaccurate premium pricing.174,175 Additionally, risk corridors can enforce minimal profits for insurance providers by implementing a payment to the government should plan profits exceed a federally established value (based on market dynamics).176 This value will vary across plans but generally be defined as the total revenue from insurance premiums minus the administrative costs (administrative costs are not allowed to exceed one-fifth of the revenue from premiums).177,178 If the plan’s profits/losses are within 3% of this federally established value, no money will flow out of or into it (plans will keep these profits/gains).179 However, if the plan’s profits are greater than 3%, but lower than 8%, of the threshold value, the plan will have to contribute 50% of the gains to the government.180,181 If the plan’s losses are greater than 3%, but lower than 8%, of the threshold value, the government will pay for 50% of the losses.182,183 In the unlikely scenario where a plan’s profit exceeds the threshold value by 8% or more, the plan will have to pay the government 80% of the profits.184,185 If the plan’s losses are 8% or greater of the threshold value, the government will subsidize 80% of the losses.186,187 Risk corridors would directly increase competition among insurance providers, given that risk selection is no longer a necessity and that they will be

Thyagaraj 29 compensated should they enroll high-risk individuals.188 Such actions would reduce premiums, by steering the market towards a more perfectly competitive one, and directly combat the adverse selection spiral.

Limitations of the PPACA Although the PPACA does have promising potential to reduce, or even reverse, adverse selection, it is still lacking in a few regards: 1) Risk selection may still persist, 2) Adding children under age twenty-six to parental plans may yield no positive value, and 3) Current empirical evidence suggests the individual mandate is not achieving its theoretical potential.

In spite of the PPACA outlawing insurance providers from selecting customers based on medical disposition, risk selection could still indirectly persist. If the HIM offers more comprehensive insurance plans compared to private providers outside the exchange, more high-risk individuals are likely to sign up for the HIM insurance plans.189 This would lead to private insurance providers having a lower-risk population group, while the HIM could potentially face adverse selection and fail altogether because of the concentrated high-risk population it enrolls.190 Furthermore, while insurance providers can no longer deny high-risk individuals coverage, they have the power to drop expensive medical treatments and make patients in need of those treatments pay for those services themselves.191 Similarly, although it does enforce plan standardization, the PPACA does not require that private insurance providers offer one silver and one gold plan (this is a requirement for the HIM).192 As a result, private providers can choose to offer only baseline products, in an attempt to enroll a greater number of low-risk individuals who are confident of their good health status.193 Such a situation could further disrupt the life

Thyagaraj 30 cycle of the HIM through increased adverse selection against it. Furthermore, the “Insurer Risk Adjustment Transfers” provision of the PPACA, which compensates insurance plans possessing high-risk profiles with funds from low-risk plans, could potentially allow risk selection to persist if insurance providers can better understand medical ailments and associated needs compared to the federal entity presiding over the health care market.194 The PPACA also requires that children be kept on their parents’ health insurance plans until age twenty-six.195 Although this provision helps increase coverage among those in their early twenties, it, more importantly, increases losses for insurance providers. Given that these individuals (under age twenty-six) are added at no cost to parental insurance plans, insurers are forced to insure these individuals without receiving any payment. To compensate for the increased population, insurance providers raise premiums, which does not benefit those paying for insurance. Without the provision requiring children under age twenty-six to be kept on parental insurance plans, adverse selection would still persist.196 Unless they have medical ailments, teenagers and individuals in their twenties are the least likely to purchase health insurance. Given the affordable nature of the PPACA’s penalties, many young individuals might find paying the fines to be more cost-effective than purchasing insurance.197 Therefore, only high-risk individuals from this age category suffering from medical ailments would purchase health insurance, further fueling the adverse selection problem.198 Hence, keeping children on parental insurance plans up until age twenty-six may not yield any positive value, as adverse selection still exists.

Thyagaraj 31 Apart from the economic inefficiencies described above, empirical evidence from the first year of the PPACA’s implementation (2014) suggests that the individual mandate’s effects may not be as powerful as predicted.199 In a March 2014 Wall Street Journal article, the number of first-year enrollees into the ACA program during the first three months was only five million, in contrast to the Obama Administration and Congressional Budget Office’s predictions of seven million.200 Furthermore, of those five million enrollees, only 80% were capable of and did pay for their first monthly premium.201 Empirical evidence also shows that the individual mandate “had the least effect on those it was supposed to encourage to gain coverage – the uninsured.”202 Another weak point of the individual mandate is its non-compliance penalty: Although there is a penalty for not purchasing insurance, it is only the larger of $95 or 1% of gross annual income.203,204 This amount is payable by most people and as a result may be preferable to purchasing health insurance and paying the recurring premiums. Therefore, although the individual mandate is necessary for the reduction of adverse selection, its institution as part of the PPACA may need some strengthening.

Conclusion Based on the claims and analysis presented above, the Patient Protection and Affordable Care Act contains the necessary provisions to help reduce, if not prevent, adverse selection in the health insurance market. While it is far from perfect, this legislation should help reduce premiums for customers and also increase the efficiency of the entire health insurance market in general.

An interesting point to note is the claim addressed by Mwachofi et al. (2010) which states that “a common argument in the health policy debate is that market forces

Thyagaraj 32 allocate resources efficiently in health care, and that government intervention distorts such allocation.”205 Although the PPACA emphasizes government incorporation more than other recent legislative acts, many developed countries where health care infrastructure is productive have governments disseminating such services.206,207 Both The Beveridge Model and The National Health Insurance model involve government intervention and have had positive results; the former treats medical service as a public good owned by the government that does not require the user to pay for use, while the latter utilizes “government-run insurance programs” that purchase health insurance from private providers and distribute it to individuals in exchange for a monthly premium contribution. The National Health Insurance model features coverage for all individuals, but is also less expensive and more efficient than the insurance model found in the US.208 Hence, contrary to popular belief, there is significant evidence to believe that government intervention is not necessarily deleterious.

Given the recency of the PPACA, theory may differ from reality. While such is the case with any new legislation, the PPACA seems to provide strong economic provisions to finally counter the adverse selection issue that has plagued the health insurance market since its inception.

Thyagaraj 33 Notes 1

Fuchs, Victor R. "Why Do Other Rich Nations Spend So Much Less on Healthcare?"

The Atlantic, July 23, 2014. Accessed December 17, 2014.

2

Bidwell, Allie. "U.S. Medical Research Spending Drops While Asia Makes Gains."

U.S. News. Last modified January 2, 2014. Accessed April 5, 2015.

3

Wayne, Alexander. "Improving Health Care Is Billionaire Peterson’s Next Mission."

Bloomberg. Last modified November 21, 2014. Accessed February 15, 2015.

4

Shah, Yagana. "U.S. Ranks Near Bottom Among Advanced Nations In Efficiency Of Health Care Spending." The Huffington Post. Last modified December 12, 2013.

Accessed February 28, 2015.

5

Ibid.

6

Baicker, Katherine, and Amitabh Chandra. "Aspirin, Angioplasty, and Proton Beam Therapy: The Economics of Smarter Health Care Spending." Jackson Hole Economic Policy Symposium. September 9, 2011.

7

Garber, Alan M., and Jonathan Skinnar. "Is American Health Care Uniquely Inefficient?" Journal of Economic Perspectives 22, no. 4 (2008): 27-50.

8

Frakt, Austin. "Allocative vs. productive efficiency." The Incidental Economist. Last modified February 7, 2012. Accessed February 28, 2015.

9

Ibid.

10

Garber, Alan M., and Jonathan Skinnar. "Is American Health Care Uniquely Inefficient?" Journal of Economic Perspectives 22, no. 4 (2008): 27-50.

11

"Charlotte Observer/Raleigh News & Observer: Patients Pay More For Tests And Procedures If Their Physician Is Employed By A Hospital." AHIP Coverage. Last modified December 17, 2012. Accessed February 15, 2015.

12

Olivella, Pau, and Marcos Vera-Hernandez. "Testing for Asymmetric Information in Private Health Insurance." Journal of Economic Literature D82 (September 26, 2011).

13

Burgess, James F., Jr. "Innovation and efficiency in health care: does anyone really know what they mean?" Health Systems 2 (May 11, 2012): 7-12.

14

Hettrich, Carolyn M., Richard C. Mather, III, and Manish K. Sethi. "The costs of defensive medicine." American Academy of Orthopaedic Surgeons, December 2010.

Accessed February 15, 2015.

Thyagaraj

15

Sekhar, Sonal M., and N. Vyas. "Defensive Medicine: A Bane to Healthcare." Ann Med Health Sci Res. 3, no. 2 (April/May 2013): 295-96.

16

Frick, Kevin. "Physician Induced Demand." Business and policy through an Economist's Lens. Last modified January 30, 2012. Accessed March 19, 2015.

17

Green, Jerry. "Physician-Induced Demand for Medical Care." The Journal of Human Resources 13, no. 0 (1978): 21-34.

18

Frakt, Austin. "Health insurance market failures (and what can be done about them)."

The Incidental Economist. Last modified February 16, 2011. Accessed April 5, 2015.

19

Mwachofi, Ari, and Assaf F. Al-Assaf. "Health Care Market Deviations from the Ideal Market." Sultan Qaboos University Medical Journal 11, no. 3 (August 15, 2011): 328-37.

20

Handel, Benjamin. "Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts." National Bureau of Economic Research, September 2011.

21

Cutler, David M., and Richard J. Zeckhauser. "Adverse Selection in Health Insurance."

National Bureau of Economic Research, no. 6107 (July 1997).

22 Cutler, David M. "Health Insurance." Last modified 1994. Microsoft PowerPoint.

23

Ibid.

24

Einav, Liran, and Amy Finkelstein. "Selection in Insurance Markets: Theory and Empirics in Pictures." J Econ Perspect 25, no. 1 (December 30, 2011): 115-38.

25

Ibid.

26

Ibid.

27

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

28

Ibid.

29

Cutler, David M., and Richard J. Zeckhauser. "Adverse Selection in Health Insurance."

National Bureau of Economic Research, no. 6107 (July 1997).

30

Snook, Thomas D., and Ronald G. Harris. "Adverse Selection and the Individual Mandate." Milliman Health Reform Briefing Paper, 2009.

31

Ibid.

34

Thyagaraj

32

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

33

Cutler, David M., and Richard J. Zeckhauser. "Adverse Selection in Health Insurance."

National Bureau of Economic Research, no. 6107 (July 1997).

34

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

35

Ibid.

36

Cutler, David M., and Richard J. Zeckhauser. "Adverse Selection in Health Insurance."

National Bureau of Economic Research, no. 6107 (July 1997).

37

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

38

Ibid.

39

Ibid.

40

Cutler, David M., and Richard J. Zeckhauser. "Adverse Selection in Health Insurance."

National Bureau of Economic Research, no. 6107 (July 1997).

41

Frakt, Austin. "Adverse Selection." The Incidental Economist. Last modified January 25, 2012. Accessed March 1, 2015.

42

Mangan, Dan. "Medical Bills Are the Biggest Cause of US Bankruptcies: Study."

CNBC. Last modified June 25, 2013. Accessed March 19, 2015.

43

"The Uninsured: Access to Medical Care Fact Sheet." American College of Emergency Physicians. Accessed March 19, 2015.

44

Goolsby, Alexander W., LeighAnne Olsen, and Michael McGinnis. "Healthcare Data: Public Good or Private Property?" In Clinical Data as the Basic Staple of Health Learning: Creating and Protecting a Public Good: Workshop Summary. Washington D.C.: The National Academies Press, 2010.

45

"The Uninsured: Access to Medical Care Fact Sheet." American College of Emergency Physicians. Accessed March 19, 2015.

46

Goolsby, Alexander W., LeighAnne Olsen, and Michael McGinnis. "Healthcare Data: Public Good or Private Property?" In Clinical Data as the Basic Staple of Health Learning: Creating and Protecting a Public Good: Workshop Summary. Washington

35

Thyagaraj

D.C.: The National Academies Press, 2010.

47

Shepard, Mark. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange." Harvard University, January 13, 2015.

PDF.

48

Semro, Bob. "Narrowing Provider Networks Is All About Cutting Costs, But It Also Can Lead to Lower Premiums." The Huffington Post. Last modified October 3, 2014.

Accessed April 10, 2015.

49

Shepard, Mark. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange." Harvard University, January 13, 2015.

PDF. 50

Semro, Bob. "Narrowing Provider Networks Is All About Cutting Costs, But It Also Can Lead to Lower Premiums." The Huffington Post. Last modified October 3, 2014.

Accessed April 10, 2015.

51

Shepard, Mark. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange." Harvard University, January 13, 2015.

PDF. 52

Semro, Bob. "Narrowing Provider Networks Is All About Cutting Costs, But It Also Can Lead to Lower Premiums." The Huffington Post. Last modified October 3, 2014.

Accessed April 10, 2015.

53

Ibid.

54

Shepard, Mark. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange." Harvard University, January 13, 2015.

55

Gruber, Jonathan. "The Impacts of the Affordable Care Act: How Reasonable Are the Projections?" National Bureau of Economic Research H3, no. 118 (June 2011).

56

Shepard, Mark. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange." Harvard University, January 13, 2015.

PDF.

57 "Adverse Selection Issues and Health Insurance Exchanges Under the Affordable Care

Act." National Association of Insurance Commissioners, 2011.

58

Ibid.

59 Ibid.

36

Thyagaraj

60

Ibid.

61

Ibid.

62 Lueck, Sarah. "States Should Take Additional Steps to Limit Adverse Selection

Among Health Plans in an Exchange." Center on Budget and Policy Priorities. Last modified June 28, 2011. Accessed September 6, 2014.

63

Ibid.

64

Blumberg, Linda J. "Addressing Adverse Selection in Private Health Insurance Markets." Congress of the United States Joint Economic Committee, September 22, 2004.

65 Lueck, Sarah. "States Should Take Additional Steps to Limit Adverse Selection

Among Health Plans in an Exchange." Center on Budget and Policy Priorities. Last modified June 28, 2011. Accessed September 6, 2014.

66

Blumberg, Linda J. "Addressing Adverse Selection in Private Health Insurance Markets." Congress of the United States Joint Economic Committee, September 22, 2004.

67

Ibid.

68

Ibid.

69 Garber, Alan M., David M. Cutler, and Richard J. Zeckhauser. "Frontiers in Health

Policy Research." National Bureau of Economic Research 1 (January 1998).

70

Ibid.

71

Ibid.

72

Cutler, David M., and Richard J. Zeckhauser. "Adverse Selection in Health Insurance."

National Bureau of Economic Research, no. 6107 (July 1997).

73

Ibid.

74

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

75

Ibid.

76

Autor, David. "Adverse Selection, Risk Aversion and Insurance Markets."

Massachusetts Institute of Technology, November 21, 2010.

77

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

37

Thyagaraj

78

Ibid.

79

Autor, David. "Adverse Selection, Risk Aversion and Insurance Markets."

Massachusetts Institute of Technology, November 21, 2010.

80

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

81

Autor, David. "Adverse Selection, Risk Aversion and Insurance Markets."

Massachusetts Institute of Technology, November 21, 2010.

82

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

83

Autor, David. "Adverse Selection, Risk Aversion and Insurance Markets."

Massachusetts Institute of Technology, November 21, 2010.

84

Ibid.

85

Lueck, Sarah. "States Should Structure Insurance Exchanges to Minimize Adverse Selection." Center on Budget and Policy Priorities. Last modified August 17, 2010.

Accessed March 3, 2015.

86

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

87

Ibid.

88

Pashchenko, Svetlana, and Ponpoje Porapakkarm. "Front-loaded contracts in health insurance market: How valuable is guaranteed renewability?" American Economic Association, February 28, 2011.

89

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

90

Ibid.

91

Pashchenko, Svetlana, and Ponpoje Porapakkarm. "Front-loaded contracts in health insurance market: How valuable is guaranteed renewability?" American Economic Association, February 28, 2011.

92

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

38

Thyagaraj

93

Pashchenko, Svetlana, and Ponpoje Porapakkarm. "Front-loaded contracts in health insurance market: How valuable is guaranteed renewability?" American Economic Association, February 28, 2011.

94

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

95

Pauly, Mark. "Question/Request." E-mail message to Vedant Thyagaraj. March 30, 2015.

96

Ibid.

97

Ibid.

98

Evans, Bill. "Asymmetric Information and Adverse Selection." N.d. Microsoft PowerPoint.

99

Ibid.

100

Ibid.

101

Bhattacharya, Jay, Timothy Hyde, and Peter Tu. Health Economics. New York City, NY: Palgrave Macmillan, 2014.

102

Ibid.

103

Cohen, Alma, and Peter Siegelman. "Testing for Adverse Selection in Insurance Markets." National Bureau of Economic Research, December 2009.

104

Ibid.

105

Ibid.

106

Einav, Liran, and Amy Finkelstein. "Selection in Insurance Markets: Theory and Empirics in Pictures." J Econ Perspect 25, no. 1 (December 30, 2011): 115-38.

107

Einav, Liran, and Amy Finkelstein. "Selection in Insurance Markets: Theory and Empirics in Pictures." J Econ Perspect 25, no. 1 (December 30, 2011): 115-38.

108

"Consumer Education and Patient Engagement to Ensure the Benefits of Health Reform are Achieved." Brandeis University - The Heller School For Social Policy and Management, July 16, 2010.

109

Silvers, J. B. "The Affordable Care Act: Objectives and Likely Results in an Imperfect World." The Annals of Family Medicine, 2013, 402-05.

39

Thyagaraj

110

"Affordable Care Act." Media Services. Accessed March 4, 2015.

111

"Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act." Congressional Budget Office, March 2012.

112 Johnson, Whitney R. "The Impact of Health Reform on HSAs." International Foundation of Employee Benefit Plans.

113

Hackmann, Martin B., Jonathan T. Kolstad, and Amanda E. Kowalski. "Adverse Selection and an Individual Mandate: When Theory Meets Practice." National Bureau of Economic Research, June 2013.

114

"Consumer Education and Patient Engagement to Ensure the Benefits of Health Reform are Achieved." Brandeis University - The Heller School For Social Policy and Management, July 16, 2010.

115

Groszkruger, Dan. "Perspectives on Healthcare Reform: A Year Later, What More Do We Know?" American Society for Healthcare Risk Management of the American Hospital Association.

116

Mach, Annie L. "Individual Mandate Under ACA." Congressional Research Service, August 12, 2014.

117

Ibid.

118

Ibid.

119

Friedman, Ari, and Nora Becker. "Understanding the Individual Mandate's SCOTUS Pivot Points." LDI Health Economist. Last modified April 2012. Accessed March 4, 2015.

120

Ibid.

121

Hackmann, Martin B., Jonathan T. Kolstad, and Amanda E. Kowalski. "Adverse Selection and an Individual Mandate: When Theory Meets Practice." National Bureau of Economic Research, September 2, 2014.

122

Ibid.

123

Ibid.

124

Williams, Roberton. "How Big Will Obamacare Penalty Taxes Be?" Forbes. Accessed March 4, 2015.

40

Thyagaraj

125

C, Eibner, and Price CC. "The Effect of the Affordable Care Act on Enrollment and Premiums, With and Without the Individual Mandate." RAND Corporation, 2012.

126

Rosenbaum, Sara. "The Patient Protection and Affordable Care Act: Implications for Public Health Policy and Practice." Public Health 126, no. 1 (January/February 2011): 130-35.

127

"Adverse Selection Issues and Health Insurance Exchanges under the Affordable Care Act." National Association of Insurance Commissioners, 2011.

128

Klein, Ezra. "What ‘Left’ and ‘Right’ Really Mean." The Washington Post. Last modified February 24, 2012. Accessed March 4, 2015.

129

"Massachusetts Health Care Reform: Six Years Later." The Henry J. Kaiser Family Foundation, May 2012.

130

Ibid.

131

Ibid.

132

Hackmann, Martin B., Jonathan T. Kolstad, and Amanda E. Kowalski. "Adverse Selection and an Individual Mandate: When Theory Meets Practice, June 2013.

133

Ibid.

134

Hackmann, Martin B., Jonathan T. Kolstad, and Amanda E. Kowalski. "Adverse Selection and an Individual Mandate: When Theory Meets Practice." National Bureau of Economic Research, September 2, 2014.

135

"Adverse Selection Issues and Health Insurance Exchanges under the Affordable Care Act." National Association of Insurance Commissioners, 2011.

136

CMS.gov. "Creating a New Competitive Health Insurance Marketplace." Center for Medicare & Medicaid Services. Accessed March 5, 2015.

137

Ibid.

138

Ibid.

139

"Adverse Selection Issues and Health Insurance Exchanges under the Affordable Care Act." National Association of Insurance Commissioners, 2011.

140

"Policy Brief #4: Ensuring Exchange Stability and Protecting Against Adverse Selection." Building a Better Health Care Marketplace.

41

Thyagaraj

141

Silow-Carroll, Sharon, Diana Rodin, Tom Dehner, and Jaimie Bern. "Health Insurance Exchanges: State Roles in Selecting Health Plans and Avoiding Adverse Selection." The Commonwealth Fund. Last modified March 17, 2011. Accessed March 5, 2015.

142

Ibid.

143

"Adverse Selection Issues and Health Insurance Exchanges under the Affordable Care Act." National Association of Insurance Commissioners, 2011.

144 Lueck, Sarah. “States Should Take Additional Steps to Limit Adverse Selection Among Health Plans in an Exchange." Center on Budget and Policy Priorities. Last modified June 28, 2011. Accessed September 6, 2014.

145

Ibid.

146

"Adverse Selection Issues and Health Insurance Exchanges under the Affordable Care Act." National Association of Insurance Commissioners, 2011.

147

Ibid.

148

Ibid.

149

Ibid.

150

Lueck, Sarah. "States Should Structure Insurance Exchanges to Minimize Adverse Selection." Center on Budget and Policy Priorities. Last modified August 17, 2010.

Accessed March 3, 2015.

151

Ibid.

152

Handel, Ben. "Hi/Few Questions." E-mail message to author. March 26, 2015.

153

Handel, Ben, Igal Hendel, and Michael D. Whinston. "Equilibria in Health Exchanges: Adverse Selection vs. Reclassification Risk." National Bureau of Economics, January 7, 2015.

154

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

155

Ibid.

156

Ibid.

157

"Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act." American Academy of Actuaries, June 2011

42

Thyagaraj

158

Ibid.

159

"Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors."

The Henry J. Kaiser Family Foundation - Health Policy Research, Analysis, Polling, Facts, Data and Journalism. Last modified January 22, 2014. Accessed September 20, 2014.

160

Ibid.

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

161

162

"Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors."

The Henry J. Kaiser Family Foundation - Health Policy Research, Analysis, Polling, Facts, Data and Journalism. Last modified January 22, 2014. Accessed September 20, 2014.

163

"Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act." American Academy of Actuaries, June 2011.

164

Ibid.

165

Ibid.

166

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

167

"Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act." American Academy of Actuaries, June 2011.

168

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

169

Ibid.

170

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

171

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

43

Thyagaraj

172

"Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act." American Academy of Actuaries, June 2011.

173

Ibid.

174

Ibid.

175

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

176

"Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act." American Academy of Actuaries, June 2011.

177

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

178

"Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act." American Academy of Actuaries, June 2011.

179

Ibid.

180

Ibid.

181

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

182

Ibid.

183

"Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act." American Academy of Actuaries, June 2011.

184

Ibid.

185

Greenwood, Kate, J.D. "The Affordable Care Act’s Risk Adjustment and Other RiskSpreading Mechanisms: Needed Support for New Jersey’s Health Insurance Exchange."

Rutgers Center for State Health Policy, August 2012.

186

187

Ibid.

"Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act." American Academy of Actuaries, June 2011.

44

Thyagaraj

188

Ibid.

189

"Adverse Selection Issues and Health Insurance Exchanges under the Affordable Care Act." National Association of Insurance Commissioners, 2011.

190

Ibid.

191

Shepard, Mark. "Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange." Harvard University, January 13, 2015. PDF. 192 "Adverse Selection Issues and Health Insurance Exchanges under the Affordable Care Act." National Association of Insurance Commissioners, 2011.

193

Ibid.

194

Handel, Ben. "Hi/Few Questions." E-mail message to author. March 26, 2015.

195

"Health coverage for children under 26." HealthCare.gov. Accessed March 5, 2015.

196

Handel, Ben. "Hi/Few Questions." E-mail message to author. March 26, 2015.

197

Ibid.

198

Ibid.

199

McCloskey, Abby, and Tom Miller. "The Individual Mandate Goes Poof." The Wall Street Journal, March 26, 2014, Opinion.

200

Ibid.

201

Ibid.

202

Ibid.

203

Williams, Roberton. "How Big Will Obamacare Penalty Taxes Be?" Forbes. Accessed March 4, 2015.

204

McCloskey, Abby, and Tom Miller. "The Individual Mandate Goes Poof." The Wall Street Journal, March 26, 2014, Opinion.

205

Mwachofi, Ari, and Assaf F. Al-Assaf. "Health Care Market Deviations from the Ideal Market." Sultan Qaboos University Medical Journal 11, no. 3 (August 15, 2011): 328-37.

206 Ibid.

45

Thyagaraj

207

Reid, T. R. The Healing of America. New York, NY: The Penguin Press, 2009.

208

Ibid.

46

Thyagaraj

47

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