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Employment and Health Benefits: A Connection at Risk
not individual purchasers of health coverage, and on choices among health plans, not the choice to purchase or not purchase coverage.
As defined in Chapter 1, biased risk selection exists (1) when individuals or groups that purchase health coverage differ from nonpurchasers in their likelihood of incurring health care expenses or (2) when those who enroll in competing health plans differ in the level of risk they present to specific plans. The first kind of risk selection primarily involves the market for individual and small-group coverage in which those with higher-risks are thought to be more likely than those with lower risks to purchase insurance.1 The individual and small-group market also suffers from the second form of biased risk selection when higher-risk purchasers seek more generous or flexible coverage than lower-risk purchasers.
In general, because large employers almost universally provide health benefits and have more predictable costs, large groups present fewer problems with risk selection than either individuals or small groups. However, problems can arise in larger groups when they create an internal market by offering employees a choice among health plans and their higher-risk and lower-risk individuals select different plans.
One result of risk selection is risk segmentation, the clustering of individuals at higher and lower risk of incurring health care expenses in different health plans or insurance pools. As noted in Chapter 1, risk segmentation can also occur when insurers experience rate groups on the basis of their claims (cost) history and when larger, less risky employers depart the group insurance market—as most have—in favor of self-insurance.2
Some suggestive information on differences between enrollees with individual coverage (who must seek out coverage for themselves) and those with group coverage (who have it offered to them as a matter of routine) is available from an insurer who has not used medical underwriting to screen individual purchasers. Independence Blue Cross (Philadelphia), which offers individual coverage without medical underwriting on an open enrollment basis throughout the calendar year for its five-county service area, reports information on both its individual and its group enrollment. For 1987, its individual subscribers were 6 years older on average than its group subscribers, had a 46 percent higher hospital admission rate, and incurred costs that were 60 percent higher (Independence Blue Cross and Pennsylvania Blue Shield, 1988). Fifty-five percent of the individual subscribers were age 50 or over, compared with 35 percent of the group subscribers.
Risk segmentation also can occur when individual choice is quite limited. As noted in Chapter 1, risk segmentation among the German sickness funds occurs because plans draw or are assigned their membership from occupational and other groups that differ in age, income, and other risk factors (Wysong and Abel, 1990).