HM820 - Class 2 (Adverse Selection)

Question 1

What is Adverse Selection

Answer 1

A transaction that involves a hidden “type” that only one side can observe.

A type of Asymmetric Information

Example: Is when a patients’ willingness to pay is between 1 and infinity? What do you do? You don’t offer insurance at all cause you don’t know how to price/who is who (excersise example from class)

Question 2

What is the water bottle and poison analogy given to better understand adverse selection that explains the subprime mortgage crisis?

Answer 2

If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.

Question 3

What is Asymmetric Information

Answer 3

General term for transactions in which one side knows more than the other.

Question 4

What are the types of Asymmetric Information

Answer 4

1. Moral Hazard (Hidden Action)
2. Adverse Selection (Hidden Type)
3. Credence Good (Hidden Need)

Question 5

What are the three potential regulations that can be used as a lever to address adverse selection within healthcare

Answer 5

1. Guaranteed Issue: make it against the law for an insurer to turn away a patient who wants to buy insurance.
2. Community Rating: require insurers to charge all consumers the same price.
3. Individual Mandate: require that all state residents buy insurance or else face massive penalties at the end of the year.

Question 6

What is Guaranteed Issue

Answer 6

Regulation that makes it against the law for an insurer to turn away a patient who wants to buy insurance.

Question 7

What is Community Rating

Answer 7

Regulation that require insurers to charge all consumers the same price.

Question 8

What is Individual Mandate

Answer 8

Regulation that requires all state residents to buy insurance or else face massive penalties at the end of the year.

Question 9

What are the three legs of the stool that make up the ACA?

Answer 9

1. Individual mandate
2. Community rating & Guaranteed issue
3. Premium subsidies

Question 10

What is Cream Skimming (cherry picking)

Answer 10

• to attract particular types of patients in a world of adverse selection.

A practice where insurers provide coverage to a group of individuals who are less likely to file claims (less expensive to cover) than the population average, thereby increasing the insurers’ profits.

Question 11

What are examples of cream skimming exhibited by insurers

Answer 11

Offering gym membership to attract healthy people and deter unhealthy people.

Stop covering HIV medication to deter expensive HIV patients from joining their plan

Question 12

What is Medicare Advantage

Answer 12

Plans cover all of the enrollee’s medical costs, both drug related and other costs.

…they want people to take those meds to PREVENT hospitalizations

Question 13

What are the effects of risk adjustment in Medicare Advantage.

Answer 13

The risk adjustment in Medicare Advantage plans actually made the cream skimming issue worse.

Question 14

What is a risk score for a person

Answer 14

A score that health plans give to patients through a formula.

Question 15

What is risk adjustment

Answer 15

Adjusting plans based on risk of patient health (patients getting a risk score and then plans balancing their pool accordingly)

Question 16

What is upcoding

Answer 16

in healthcare changing the code that the person is assigned - the diagnosis or risk score - to collect more money for more proceedures

Ex: Going to elderly folks homes to do in-person screenings (find more things, bill more)

Question 17

What is a natural practice for insurers operating in a marketplace in which consumers can choose amongst multiple plans? (Pre-quiz question)

Answer 17

Seek to attract lower-risk individuals - cream skim!

Question 18

What regulatory response is intended to prevent insurers from denying coverage? (Pre-quiz question)

Answer 18

Guaranteed Issue

Question 19

In the context of providers facing adverse selection, what behavior is implied by “cream skimming?” (Pre-quiz question)

Answer 19

Refusing to treat any high-risk patients

Question 20

What impact did risk adjustment have on Medicare Advantage profits? (Pre-quiz question)

Answer 20

It increased the profitability of all plans

Question 21

What is a potential solution to counteract adverse selection in insurance markets? (Pre-quiz question)

Answer 21

Implementing an individual mandate

Question 22

Does risk adjustments in medicare advantage plans make cream skimming better or worse?

Answer 22

Worse!

The risk adjustment in Medicare Advantage plans actually made the cream skimming issue worse.

How?

MA plans are really aggressive with screenings to find high risk patients/diagnose more problems, to then get more money

Question 23

What is the full context for why risk adjustments in medicare advantage plans were introduced, and what is the outcome?

Answer 23

Context:
The government was trying to solve for cream skimming, so they came up risk adjustment.

What the gov did in MA is to divide up people into 10 categories - from low risk to risk - based on broad characteristics. They created these scores. Then we’re going to divide up the people based on these scores. Gov then does an analysis and determines the subsidy for the different groups.

Result:
The risk adjustment in Medicare Advantage plans actually made the cream skimming issue worse. Risk adjustment can actually make cream skimming problem worse - HOW?

They are really aggressive with screenings to find high risk patients/diagnose more problems, to then get more money