Selection-Proof Health Insurance Exchanges

Despite efforts at risk adjustment, the Affordable Care Act (ACA) Health Insurance Exchanges exhibited higher premiums and fewer options in 2018 than in previous years. This could indicate both adverse and/or preferred risk selection; losses to plans that attract high-risk enrollees, as well as rewards for plans that can reject or avoid them. This article proposes an elaborate competition-based mechanism (BARDR) for coordinating prospective reimbursement and premiums in health insurance exchanges. It then investigates whether or not the mechanism eliminates all selection incentives, or is ``selection-proof''. The article models a health insurance exchange within which consumers, private health plans, and a sponsor interact. Plans and consumers each hold private information regarding an aspect of the underlying cost of an insurance arrangement, of which the sponsor is unaware. The BARDR mechanism relies on four parts: i) competitive bidding, ii) selection of an ``acceptable set'', iii) a reinsurance mandate, and iv) a modified Duggan-Roberts mechanism. Results show that, under traditional market mechanisms, both adverse and preferred risk selection occur. The BARDR mechanism, however, exhibits no evidence of either type of selection. Furthermore, numerical simulations show that it achieves the first-best outcome for over 61% of patients. The BARDR mechanism thus eliminates both forms of selection while remaining fully prospective, and is therefore selection-proof.