Tail People: The Extremely Under and Overcompensated in Individual Health Insurance Markets

Sophisticated morbidity-based risk adjustment systems leave individual health insurance markets with some very highly overcompensated individuals as well as some very highly undercompensated individuals. This paper focuses on the top and bottom 1% and .1% of the distribution of spending of risk adjusted payment. The “tail people” as we call them account for a large share of spending, very large shares of the unexplained variance in a health care payment system, and exhibit highly atypical patterns of spending. The spending and residual spending of those extremely undercompensated are more persistent and predictable than spending in other parts of the distribution. Tail people account for much of the threat of selection problems in individual health insurance markets.