The most powerful tool that health plans have to limit or channel risk selection is medical underwriting, which allows them to classify risks, price them, and accept, reject, or limit coverage for individuals and groups. The most extreme form of underwriting is to exclude altogether from coverage individuals with certain characteristics, such as HIV infection, and entire categories of employers or occupations, such as hairdressers and lawyers—the latter for higher perceived risk of litigation. Coverage for a preexisting condition can also be barred temporarily or permanently. In addition, premiums for individual and small-group coverage are commonly based on individual risk factors, including both demographic characteristics and health status. Figure 5.1 shows how age and gender can affect premiums (CRS, 1988b). A health plan that does not use medical underwriting makes itself vulnerable to unfavorable risk selection if its competitors do engage in risk rating and similar practices.

Benefit design can crucially affect a health plan's potential for unfavorable or favorable risk selection. The range of relevant design features is broad and includes the types of services, providers, and sites of care cov-

FIGURE 5.1 Variation in average annual plan premiums for the typical health plan, by age and gender, 1986. SOURCE: Adapted from CRS, 1988b, Vol. 1, p. 41; original data from Hay/Huggins.