Risk Selection and Risk Adjustment: Improving Insurance in the Individual and Small Group Markets‪.‬

Insurance market reforms face the key challenge of addressing the threat that risk selection poses to the availability of stable, high-value insurance policies that provide long-term risk protection. Many of the strategies in use today fail to address this breakdown in risk pooling, and some even exacerbate it. Flexible risk adjustment schemes are a promising avenue for promoting market stability and limiting insurer cream-skimming, potentially providing greater benefits at lower cost. Reforms intended to increase insurance coverage and the value of care delivered will be much more effective if implemented in conjunction with policies that address these fundamental selection issues. The individual and small group markets for purchasing health insurance in the United States are widely acknowledged to function poorly. Several features of these markets undermine the pooling of risks, expose people to premium increases if they fall ill, cause job lock, and reduce insurance coverage among those most in need of health care. Furthermore, insurers engage in a variety of costly and welfare-reducing activities designed to attract healthier enrollees and to avoid attracting the ill.