Explainer: “After adverse selection” — adverse selection, age-cost curves, and induced utilization.

Imagine an open enrollment period. If there is a plan that provides richer benefits those who, based on their own knowledge of their own specific illness burden, expect moderate to heavy utilization are more likely to choose a benefit rich plan. That’s adverse selection and it applies to plan choice.

Since risk-burden correlates with age, when adverse selection takes place, the richer benefit plan will also have a greater average age.

Now suppose a limited day of jubilee arrives. The heavens part, and down comes an army of angels who proceed to cure every instance of every specific illness burden known to earth, except for aging. Then, they go home and let nature again take its course.

Two effects remain with regard to the plan membership between the plans chosen.

  1. The plan into which the adverse selectors self-placed has an older average age.
  2. The plan into which the adverse selectors self-placed has richer benefits.

Because of their greater average age, the adverse selectors group would likely be more vulnerable to whatever nature brings their way. In other words, the old will still have higher claims than the young, on average.

Because of their better benefits, the adverse selectors group will be able to more easily afford care than the others, and so will utilize more of it. That’s induced utilization.

Note that induced utilization would persist for the rest of the plan year, even if the angels brought eternal youth.

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