Networks, Adverse Selection and races to the bottom

Dr. Amanda Kreider and colleagues have a new paper at the Journal of Health Economics that looks at how insurers respond to adverse selection caused by a specific hospital in network when the insurer has to operate as a community-rated, guaranteed issue product.  Those last five words means everyone gets charged the same price and anyone can sign up.  I’m posting the link to the working paper.

Using data from New York’s Medicaid program, we present visually transparent evidence of adverse selection in response to a health plan’s coverage of a top specialty cancer hospital. In 2005, a large, private Medicaid plan added this cancer hospital to its provider network, becoming the only private plan in Medicaid to cover the hospital. Consistent with adverse selection, demand among enrollees with cancer responded differentially to this change in coverage: the plan’s market share rose by 50% among enrollees with cancer, while remaining constant among non-cancer enrollees. One year after adding the cancer hospital, the plan reversed course and dropped the hospital from its network, leading to a symmetric outflow of enrollees with cancer.

The short version of this story is that “ABC” Hospital in New York City has a tremendous reputation at being awesome at cancer care.  As soon as a single Medicaid managed care entity elected to included ABC Hospital in-network, the insurer was adversely selected by people who really needed/wanted care at ABC instead of other hospitals in the city.  There was no corresponding increase in enrollment for individuals who did not strongly desire ABC hospital.  The incremental enrollment was unprofitable for the insurer.

The insurer dropped the hospital from the network the next year and the went from being very heavy on cancer to neither heavy nor light on cancer enrollees in a relatively short time frame.  Kreider and co-authors find that a small hospital inclusion bonus on a per-member per month basis would be sufficient to counter-act the adverse selection.

I love this paper.  It highlights that in selection markets where there is a price floor and positive selection occurs that there are very strong incentives by insurers to race to the bottom.  Imperfect risk adjustment is a critical but insufficient piece of the puzzle if we want to have a given level of quality available for enrollees.  We see this in the ACA — national PPO networks and Platinum plans are very rare.  Insurers will tweak every knob and dial that they get if the incremental membership that a particular manipulable piece of the puzzle is either profitable or not profitable.  The aggregate plan level profitability really does not matter, the incremental profitability matters.

From a policy point of view, these incentives disappear under single payer systems such as the VA or non-managed care Medicaid programs.