Risk Selection and Risk Adjustment

Improving Insurance in the Individual and Small Group Markets

Flexible risk adjustment is potentially the best mechanism for preserving and expanding the small group and individual insurance markets.

Large group health insurance plans often engage in risk selection to evaluate the likelihood that an enrollee will incur high costs. Risk selection disrupts markets for small group and individual insurance and likely adds to the number of uninsured. This article describes underlying problems in the markets for small group and individual insurance; appraises current methods of subsidizing insurance for high-risk individuals; and discusses how risk adjustment addresses conflicts between the group and individual insurance markets.

Key Findings:

  • An income-based risk adjustment approach to high-risk insurance pools is a mechanism for sharing the cost burden of subsidizing insurance for high-risk enrollees.
  • Long-term insurance contracts that guard against high premiums do not offer flexibility for enrollees to choose new health plans as their preferences and health needs change.

Large group insurance plans offer stable insurance at relatively low premiums. However, risk selection excludes individuals with high health risks and destabilizes small group and individual insurance markets. This article discusses risk selection in large group plans and considers how risk adjustment can assist the small group and individual insurance markets.