Health Care Policy Brief #4

Ensuring Stability and Protecting Against Adverse Selection

Georgia PIRG Education Fund

The idea of creating health insurance purchasing pools, like those called for in the Affordable Care Act, is not a new one.  In the past, many states have experimented with creating such pools, and their experience has shown that mechanisms like the exchange can succeed at improving choice and holding down costs.  But experience has also shown that success is not automatic. In some states, the pools have been failures, forced to close their doors by upwardly-spiraling premiums and downwardly-spiraling enrollment.  In designing their exchange, states must take care to avoid past mistakes and create a stable marketplace for individuals and small businesses.

Past failures in pooling can often be traced to a single dynamic.  Sicker enrollees congregated within the purchasing pools, with healthier enrollees remaining outside.  Because sicker enrollees cost more to insure, this drives up premiums, leading more healthy people to drop coverage and secure less expensive coverage on their own, which in turn sends premiums within the pool up again.  This phenomenon, called adverse selection, can lead to a vicious cycle that only ends with the destruction of the purchasing pool.