Equilibria in health exchanges

There is a recent paper (pdf) by Handel, Hendel, and Whinston, and it covers the issue of adverse selection through the new ACA exchanges.  The second paragraph of the abstract is this:

We find that market unravelling from adverse selection is substantial under the proposed pricing rules in the Affordable Care Act (ACA), implying limited coverage for individuals beyond the lowest coverage (Bronze) health plan permitted.  Although adverse selection can be attenuated by allowing (partial) pricing of health status, our estimated risk preferences imply that this would create a welfare loss from reclassification risk that is substantially larger than the gains from increasing within-year coverage, provided that consumers can borrow when young to smooth consumption or that age-based pricing is allowed.  We extend the analysis to investigate some related issues, including (i) age-based pricing regulation (ii) exchange participation if the individual mandate is unenforceable and (iii) insurer risk-adjustment transfers.

The core result here does not require individuals to violate the legal mandate, although the paper has a good and sobering discussion of that topic as well.  The adverse selection here is occurring across plans of differing quality.  On the positive side, having everyone enrolled in the “least comprehensive” plan can be a plus rather than a minus, depending on your point of view.  On the negative side, the paper does not consider how suppliers might respond by limiting the quality of their network and making the least comprehensive plan even less useful.

For the pointer I thank Dan in Euroland.