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Brad Delong Smackdown Watch: Adverse Selection in the Health Exchanges

And after a long drought Richard Mayhew of Balloon Juice comes through with a high-quality DeLong Smackdown! Yay!!

Richard Mayhew: Brad Delong Smackdown Watch "Brad Delong has an impressive set of thoughts...

...on PPACA implementation and a path of the future. I think he is getting one thing significantly wrong.... Recently, I wrote about AIDS medications and Gresham’s law applying to health insurance. I think this is the first salvo of the “brainpower health insurance companies devoted to gaming the system” as it is the most obvious target to create policies that are amazingly ugly to people with chronic, expensive conditions. One of the major challenges for Obamacare is transitioning the health insurance industry from being extremely competent at finding ways to not covering sick people towards finding ways to keep people from getting too sick. The biggest stick in this transition is the massive sea change in underwriting from exclusionary, statistical and experience underwriting to an inclusionary community rating system of underwriting. This change, as we have discussed ad nauseum, allows all people, including those with expensive pre-exisiitng conditions to get insurance. It is why the Exchange risk pools are sicker, on average, than the risk pools of the pre-Exchange underwritten individual insurance markets as those markets kept the sick people who could actually need services out of the market.

Insurers are required to accept and cover HIV patients. They don’t want to. So they are trying to avoid them by being fuggly.... Relatively inexpensive AIDS medication... would get put on the most expensive formulary where pre-authorizations, high co-insurance and high co-pays apply until the member reaches the out of pocket maximum. This anti-social but rationally-based business model should make the plan very unnattractive to individuals with HIV. They will logically look at the market and look for a plan that does not completely f--- them over. The same logic applies to diabetics, cancer survivors, transplant recipients and other high cost individuals. And here is where problems emerge. Once one plan in a market decides to make themselves as unattractive as possible, every other plan has to either follow suit in making themselves unattractive or be willing to take on massive health costs as they become the preferred plan for HIV positive individuals.

We’re seeing this with AIDS/HIV patients for two reasons. The first is that this is a population with known high costs that insurers really want to avoid. Secondly, there is a significant network of very effective advocates who are able to identify this as a business strategy of some insurers and scream about it. I would be shocked if other very high cost but very small population diseases are not being “top-tiered/specialty tier for generics” as a risk avoidance strategies, but I have not heard about them.

The policy solution is simple, engage in a regulatory arms race to force insurance companies to compete on providing health coverage and health improvmeent instead of cherry picking good risk and off-loading bad risk to competitors and/or government programs. This will work in most Blue states and some Red states...