Google Answers Logo
View Question
Q: Adverse selection in health insurance ( Answered,   0 Comments )
Subject: Adverse selection in health insurance
Category: Business and Money > Consulting
Asked by: mikepalumbo1234-ga
List Price: $200.00
Posted: 04 Apr 2004 03:28 PDT
Expires: 04 May 2004 03:28 PDT
Question ID: 324884
I am looking for a third party reference piece which analyzes the
impact of adverse selection for an employer who offers an HMO
alongside their standard health insurance program.

Request for Question Clarification by pafalafa-ga on 15 Apr 2004 12:59 PDT
Hello Mike,

Just to make sure we're on the same page here, are you looking for
links to articles on this topic, such as this one here:


Adverse Selection Against Generous Health Insurance Under Defined
Contribution Systems


Resolution 109 (I-97) calls on the AMA to study the mechanisms of
health insurance plan selection resulting in the adverse selection
against generous health insurance occurring under defined employer
contribution systems.  Current AMA policy (Policies H-40.969,
H-165.881, H-165.890, and H-330.933, AMA Policy Compendium) advocates
defined contribution health coverage in the public and private sectors
as a means of fostering beneficiary choice and cost-consciousness.  To
the extent that adverse selection eliminates generous insurance as
employers switch to defined contribution systems, it may pose a
problem for high-risk individuals as healthier persons gravitate
disproportionately to less expensive, less generous plans.  By
reducing pooling ? and cross-subsidies ? across risk groups, defined
contribution systems present a tradeoff between expanding consumer
choice and preserving the cross-subsidies which support generous

Council on Medical Service Report 11 finds that there is a low
prevalence of defined contribution health benefits systems and no
general trend toward defined contribution systems.  Although limited
empirical evidence suggests that defined contribution systems can
accelerate adverse selection, defined contribution systems are neither
a necessary nor sufficient condition for market exit of generous
insurance plans.  Other forces also threaten the viability of
indemnity plans, and plan failure can be forestalled by policy
interventions.  Finally, plan failure can be regarded either as an
efficient outcome of market forces or as requiring policy


...Unpublished KPMG data show that, regardless of the type of benefit
system, firms offering indemnity plans that then add HMOs to their
plan choices experience an increase in indemnity premiums.  Similarly,
HMO premiums are higher for firms that offer only HMOs compared to
firms that offer both indemnity and HMO options.  Both of these
findings suggest that increased managed care penetration affects risk
selection.  Although switching to a defined contribution system might
accelerate managed care penetration and thereby affect the viability
of indemnity insurance, it is not the sole factor in play.


If this is the type of thing you're after, I can probably rustle up a
number of fairly high-quality studies, and either link to them, or (if
they're not internet-accessible) provide citations with some relevant

If this is what you're after, please let me know how many such studies
would you expect to be cited?

And if it's NOT what you're seeking, please clarify a bit how we can best help you.


Subject: Re: Adverse selection in health insurance
Answered By: nancylynn-ga on 18 Apr 2004 14:13 PDT
Hello mikepalumbo1234-ga:
The first two resources I've listed are available at a fee of $5 each.
The rest of the resources I've listed are free.

You can purchase a copy of NBER's [National Bureau of Economic
(It's a $5 fee to download the study, payable by credit card.)

Also from NBER's "Working Papers": this August 2000 report: "Enrollee
Mix, Treatment Intensity, and Cost in Competing Indemnity and HMO
Plans" by Daniel Altman, David M. Cutler, and Richard Zeckhauser:
"We examine why managed care plans are less expensive than traditional
indemnity insurance plans. Our database consists of the insurance
experiences of over 200,000 state and local employees in Massachusetts
and their families, who are insured in a single pool. Within this
group, average HMO costs are 40 percent below those of the indemnity

(Scroll down the above page to "Download the selected file," where you
can enter payment information. The fee is $5.)

See the AHCPR's late 1990s study "Research about Managed Care." (AHCPR
is the research publishing division of AHRQ: the Agency for Healthcare
Research and Quality, which is under the U.S. Department of Health &
Human Services.)

Here's the "Contents" page of that study:

And the "Impact On Cost" portion:

" . . . In this study, investigators evaluated the effectiveness of
managed care cost containment strategies in the group health benefit
plans of private- and public-sector employers in the United States.
Data were used from the Foster Higgins annual Health Care Benefit
Surveys for 1986-92. Results suggest that group health plans in which
all enrollment is in one type of plan (traditional indemnity, PPO, or
HMO) are about 6 percent less costly than plans that allow employee
choice between different plans.

"For employers who offer multiple health plan choices, increased
enrollment of employees in HMOs was associated with higher overall
costs. However, HMOs were the least costly option for employers
offering only one choice for health coverage. (Project Officer:
Michael Hagan. Project dates: 9/1/92-8/31/94)."

At the bottom of that page you'll see a notation that the study is
current as of 1997.

AHRQ's homepage is:

At their "Fact Sheets" page:
I found:

"Health Care Costs
04/02 AHRQ Research to Reduce Cost and Improve the Quality of Health Care
08/01 Focus on Cost-Effectiveness Analysis at AHRQ
09/02 Health Care Costs"

All three of which are clickable links.

When I clicked on "Health Care Costs:
I found this information:
Joel Cohen, Ph.D.
Center for Cost and Financing Studies
Phone: 301-427-1659

Dr. Cohen is the contact person for research materials. Please e-mail
him if you'd like to inquire about any additional, or more recent,
AHRQ studies.
"Cost Impact Study of Mandated Benefits in Texas Report # 1"
issued July 2000 under the auspices of the Texas Department of insurance.

The study, and the accompanying chart, compares costs among PPO/POS
and HMOS. "Costs include adverse selection inherent in a mandated

" Health and Health Insurance: Analysis of Plan Switching Behavior,"
published on Nov. 20, 2003, and prepared by:
Department of Health Care Policy, Harvard Medical School
Department of Biostatistics, the Harvard School of Public Health
Department of Health Policy and Management, Harvard School of Public Health
The John F. Kennedy School of Government

You can read it at:

"Majority of employers offer a choice of more and less generous health
insurance plans to their employees, who choose a plan according to
their preferences and health status. We analyze the switching behavior
of employees between plans of different generosity caused by changes
in health status, and compare medical spending of switchers and
stayers in plans of origin and destination. We show that switchers to
a less generous plan exhibit lower medical spending prior to the
switch, while the switchers to a more generous plan anticipate higher
spending and delay their spending until after the switch.This transfer
of costs from a less to a more generous plan increases the burden of
adverse selection."

"Introduction: Sixty percent of the population in the United States is
covered by employer sponsored health insurance. More then a half of
those employees can choose among competing health insurance plans that
vary in generosity. . .  . While competition is usually considered to
be beneficial in the private market, its effects in the health
insurance market can be a mixed blessing. Although competition drives
prices down and promotes efficiency, it also results in negative
outcomes, such as adverse selection. . . ."

"Page 17: the net effect of adverse selection of $25. While our
results show the same net effect they are caused by different
reasons?the entire burden of adverse selection is born [sic] by the
higher generosity plan.There are several differences between our data
and . . . . Mean spending in these two types of plans is closer
together than in HMO and Indemnity plans that ACZ analyzed. . . ."

"Summary and Conclusions: In this article we have presented evidence
of adverse selection in a private health insurance market. Using an
administrative dataset for years 1998 and 1999 we have analyzed the
switching behavior among plans of different generosity. We have shown
the presence of adverse selection. The fact that the two types of
plans attract more and less healthy employees is not a problem, as
long as the employer cross subsidizes the costs of a more generous
plan from premiums for the less generous plan. In reality this is not
a common practice."


EBSCO is a research database available at nearly all American
libraries. You can access EBSCO from your computer if your library
card has a barcode. Just go to your local library's Web site and look
for something like "Power Library." Then enter the barcode from your
card, and go into the Database "Business Source Premier" and use key
words to locate the following articles -- if the external links I've
provided for you don't work.

"Adverse Selection and Adverse Retention," by: Daniel Altman; David M.
Cutler, and Richard J. Zeckhauser. Published in the American Economic
Review, May 1998, Vol. 88 Issue 2:

Or try the html link:

Here's an excerpt from the abstract for that article:

"Most employers providing health insurance offer a menu of plans and
allow employees to choose the plan they prefer. As a result, the
demographic mixes of insureds and, consequently, costs differ
dramatically across plans. . . . Because of this variability, insurers
are deeply concerned about how people choose their plans, as are
employers and governments that finance and monitor them, and analysts
who study them. We seek to understand who insures in which
health-insurance plan, and why they do it. This information will
enable us to correctly calculate cost differentials between plans, and
to set premiums accordingly.

" . . . . We focus in this paper on why premiums differ so much across
health-insurance plans. We show that adverse selection is
quantitatively important, but that it is more a result of low-risk
people moving out of generous plans than of high-risk people moving
into those plans. We then document the opposite of adverse selection,
a concept we term "adverse retention." Adverse retention is the
tendency for people who stay put to magnify cost differentials between
plans, as they will if they differ in age and costs are more than
linear with age. We show that adverse retention has about 60 percent
as large an effect on healthplan premiums as does adverse selection."

The July 2000, Vol. 19 Issue 4 The Journal of Health Economics
features the study "An Efficient Employer Strategy for Dealing with
Adverse Selection in Multiple-Plan Offerings: An MSA Example," written
by Mark V. Pauly and J. Bradley  Herring.

Unfortunately, the article isn't available online, but I did find this abstract:
"This paper outlines a feasible employee premium contribution policy,
which would reduce the inefficiency associated with adverse selection
when a limited coverage insurance policy is offered alongside a more
generous policy. The "efficient premium contribution" is defined and
is shown to lead to an efficient allocation across plans of persons
who differ by risk, hut it may also redistribute against higher risks.
A simulation of the additional option of a catastrophic health plan
(CHP) accompanied by a medical savings account (MSA) is presented. The
efficiency gains from adding the MSA/catastrophic health insurance
plan (CHP) option arc positive hut small, and the adverse consequences
for high risks under an efficient employee premium are also small.
[abstract from author]"

You may find some of the following information to be helpful:

"NCPA [National Center For Policy Analysis] - Study #173 - State
Health Care Reform Under The Clinton Administration":

"If insurers are allowed to alter their benefit packages and genuinely
compete (as the Heritage Foundation seems to advocate), then healthy
and sick people will gravitate to different plans and the plans with
sicker subscribers will not survive."

" . . . And it is precisely the adverse selection that results because
insurers cannot price risk accurately that has caused Aetna, the only
systemwide insurer other than Blue Cross, to leave the FEHBP. Despite
glowing descriptions by its defenders, the FEHBP has none of the
desirable characteristics of a competitive system.
"When competition is working, price reflects value; yet although there
is a 42 percent difference in value of benefits between highest and
lowest option plans, the premiums differ by 264 percent. . . ."

The Center For Studying Health Care Change publishes a journal "Risk
Management." See the article "Policy Implications of Risk Selection in
Medicare HMOs," written by  Heidi H. Whitmore, from Issue Brief No.
04, Nov. 1996:

This paper covers:

"The Issue of Risk Selection

Are Earlier Findings Still Valid?

Price Waterhouse: No Bias

HMO Payments Too High, Says HCFA Team

Favorable Selection Cited in PPRC Study

Which Results Are More Reliable?

Policy Implications"

All of which are clickable links.

From that study:

"Biased selection occurs if the medical care needs of risk HMO
enrollees differ from Medicare beneficiaries in the fee-for-service
sector. If risk enrollees are consistently healthier and less likely
to use medical care than their fee-for-service counterparts, then HMOs
experience favorable selection. If, in contrast, risk enrollees are
consistently less healthy,
then HMOs experience adverse selection. Whether Medicare saves or
loses money on the risk-contract program depends on the extent to
which risk HMOs experience selection bias. . . .

"According to a study commissioned by the American Association of
Health Plans, using the 1992 Medicare Current Beneficiary Survey
(MCBS), Jack Rodgers of Price Waterhouse found that the
characteristics predicting medical care use were approximately the
same for HMO enrollees and those in fee-for-service plans. . . . Key
among Rodgers's findings are that: Rates of chronic conditions did not
favor either HMO enrollees or fee-for-service beneficiaries. HMO
enrollees had a greater incidence of diabetes and stroke while those
in fee-for-service experienced greater rates of cancer and heart

"Report of the Working Group on Challenges to the Employment-Based
Healthcare System," issued by the U.S. Department of Labor, Nov. 14,
2001, weighs various options for healthcare plans:

" . . . Employer plans are good for covered employees - The
employer(1) plays a critical role in the delivery of health care from
a number of perspectives. As an agent for its employees, the employer,
especially the large employer, has the expertise and the resources to
knowledgeably address the complicated nuances of health care delivery.
The natural risk pooling of an employment-based group is an
appropriately balanced risk group and therefore, well adapted for an
insurance model. In addition, a large employer can wield clout in the
market place by virtue of the sheer number of employees and hence the
dollars it brings to the insurer.  . . .However, many of these
advantages are not available to the small employer"

" . . . Employers provide a "natural group" for risk pooling because
the group has been formed for a purpose other than the purchase of
health insurance. These "natural groups" all allow lower-risk
individuals to subsidize the cost of high-risk individuals within the
group and mitigate the overall problem of adverse selection."

Search Strings:

impact AND "adverse selection" AND HMO AND standard
"impact on employer" AND "adverse selection" AND HMO AND standard
"Health Care Financing Administration" AND HMO AND standard
compare AND "impact on employer" AND "adverse selection" AND HMO AND standard
compare impact employer adverse selection HMO standard
"employer offers" AND HMO and standard" AND "adverse selection"

I hope my research is of help to you. 

Please post a ?Request For Clarification,? if you need help navigating
any of the above links, or if you require clarification on any of the
above points, prior to rating my answer.

GA Researcher
There are no comments at this time.

Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  

Google Home - Answers FAQ - Terms of Service - Privacy Policy