Concerns about whether insurance sold on the individual Exchanges under the Affordable Care Act will succumb to an adverse selection death spiral have focused mainly on the shortage of younger enrollees into the system.
This shortage is potentially a problem because, due to section 1201 of the ACA, premiums for younger enrollees must be at least one third of that for older enrollees even though actuarial science tells us that younger enrollee expenses are perhaps just one fifth of those for older enrollees.
Younger enrollees are needed in large numbers to subsidize the premiums of the older enrollees. But at least premiums under the ACA respond at least somewhat to age.
The lesser studied potential source of adverse selection problems, however, is the fact that medical expenses of women for many ages are essentially double those of men and yet the ACA forbids rating based on gender.
In a rational world, one would therefore expect women of most of the ages eligible for coverage in the individual Exchanges to enroll in plans on the Exchange at a higher rate than men. But, since the women have higher than average expenses than men, premiums based on the average expenses of men and women will prove too low, creating pressure on insurers to raise prices.
And, of course, there could also be some disproportionate enrollment by older men who have higher medical expenses than women of equal age. While I welcome contrary arguments in what I regard as a fairly new area of study involving the ACA, gender-based adverse selection would certainly appear to be a real problem created by the structure of that law.
To me, it looks to be potentially as large a problem as age-based adverse selection. It is certainly one that needs continuing and careful evaluation.
I see only three limited factors that reduce what would otherwise appear to be a significant additional source for significant adverse selection. As set forth below, however, I do not believe that any of these factors are likely to materially reduce the problem.
The first is ignorance. Adverse selection emerges only if individuals can accurately foretell their future medical expenses with some accuracy. To the extent, therefore, that men and women are ignorant of the effect of gender on their projected medical expenses, adverse selection is potentially diminished. I say “potentially,” however, because of a subtlety: people don’t have to know why their expenses are what they are in order for adverse selection to emerge; they only have to be somewhat accurate in their guess.
Thus, even if men and women don’t make the cognitive leap from seeing lower (or higher) medical expenses to issues of gender, but they still on balance get it right, adverse selection can exist. Thus, I end up doubting that ignorance of the correlation between gender and medical expense is going to retard adverse selection problems very much.