With the Congressional Budget Office (CBO) projecting last month that 6 million Americans will pay a penalty rather than purchase insurance coverage as part of the health reform law, there is growing concern about the potential impact on risk pools. Such a large number of individuals out of the insurance market — most of them likely young and healthy — could lead to adverse selection in the market. Although industry experts contacted by HRW agree that the penalty likely was set too low in the first few years to persuade some individuals to purchase coverage, they disagree on whether a large number of people out of the insurance market will have a profound effect.

On Sept. 19, CBO boosted by 50% an earlier estimate, made in April 2010, that only 4 million Americans would pay the penalty.

“When the actuaries have taken a look at this, there really isn’t a solid basis for concluding that risk pools are going to be massively skewed,” says Dan Mendelson, CEO of Washington, D.C., consulting firm Avalere Health LLC. “It’s possible, but a lot of things have to line up.”

Some See Sizable Potential Problem

However, others disagree. Peter Kongstvedt, M.D., principal of Virginia-based consulting firm P.R. Kongstvedt Co., tells HRW that having millions of people, many of whom are likely healthy, out of the insurance pools certainly will have a negative impact. He says that “if someone has the option of not purchasing now and pay the penalty, save the money and enroll” only when they need it, they may take that risk. He adds that the market will become more stable when the penalties increase to a level at which they are equivalent to the annual cost of a bronze-level (i.e., the lowest allowable) plan on the exchange.

As constructed, the penalty is too weak given that it is relatively small in proportion to the amount someone would have to pay for insurance through the exchanges, adds David Tuomala, director of actuarial consulting at OptumInsight, a unit of UnitedHealth Group. “The end result is that the insured risk pool is likely to be negatively impacted.”

Tuomala explains the under his baseline assumptions, the uninsured population will shrink by 31 million to 21.4 million after further reform-law provisions take effect. “The average cost of those remaining uninsured is about 32% lower than the average cost of the currently uninsured,” he adds. “This would increase average individual market costs by over 40%.”

Under the Affordable Care Act (ACA), the penalty for not getting coverage is the greater of a flat dollar amount per individual or a percentage of an individual’s taxable income. In the first scenario, the penalty is $95 in 2014, $325 in 2015 and $695 in 2016. After 2016, the amount is indexed to inflation. The second method is computed through a portion of taxable income that is equal to a percentage of a household’s income in excess of the tax filing threshold. That percentage will be phased in starting at 1% in 2014, 2% in 2015 and finally 2.5% in 2016.

However, there are several provisions already contained in the ACA that take into account the possibility of adverse risk selection and aim to prevent that from happening. Kongstvedt says that a provision requiring insurers and self-funded employers to contribute to a premium stabilization fund, known as a transitional reinsurance program (HRW 3/26/12, p. 3), was created under the premise that adverse risk was something that might have to be dealt with in the early years of exchanges. He adds that to encourage more young people to get coverage, the reform law includes a requirement for a lower-cost “young invincible” coverage option for individuals under 30 years old. Although this option has low monthly premiums, it will have a $5,950 deductible and will be offered on exchanges only to those who don’t qualify for Medicaid and don’t receive health benefits through their job.

But if issues such as adverse selection do crop up in the exchanges at the outset, there are ways to address this situation, says Rich Stover, a principal in Buck Consultants’ Secaucus, N.J., office. He tells HRW that tweaks to the law such as limiting when people can enroll in health plans or penalizing enrollees if they switch from a lower to higher level of coverage plan within a certain period of time could be used to guard against adverse selection. However, he adds that early on, some insurers may hesitate to offer plans on the exchange until the market becomes more stabilized.

Mendelson also concedes that during the first couple of years of the exchange, insurers are likely to pad their premiums to leave themselves a cushion in case risk issues crop up.

The CBO report is available at www.cbo.gov/publication/43628.

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