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In the Federal Employees Health Benefit Program (FEHBP), workers can choose from among a wide variety of national health insurance plans that have fixed premiums across metropolitan statistical areas (MSAs) and qualifying local plans, whose premiums more closely reflect conditions in each MSA. Insurers who are part of the FEHBP are prevented from charging individually risk-rated premiums. Instead, the Federal Government contributes a fixed 75 percent of premiums up to a capped amount that is set below the national plan premiums. This capped premium subsidy in FEHBP helps reduce adverse selection, whereby consumers at low risk of health problems select suboptimal plans to avoid subsidizing high-risk consumers who increase health care costs.
Adverse selection can result in premium spirals that eliminate more generous plans as viable alternatives, but the design of the FEHBP may help to avoid such outcomes, explain Bradley M. Gray, Ph.D., of the University of Illinois at Chicago, and Thomas M. Selden, PH.D., of the Center for Cost and Financing Studies, Agency for Healthcare Research and Quality. They used FEHBP data on individual (not family) coverage for nonelderly, nonunionized enrollees and variation in the premium subsidy cap across MSAs (due to variation in local price differences) to analyze the impact of the capped premium subsidy on adverse selection.
In all cases, the fixed-effects results showed that within-MSA differences in enrollee age (one indicator of health risk) were significantly correlated with differences in the premiums that enrollees selected, evidence consistent with the presence of risk-based selection across plans. The age-premium gradient was not large, only changing about 9 percent between ages 25 and 64, but it largely disappeared as the subsidy cap increased.
More details are in "Adverse selection and the capped premium subsidy in the Federal Employees Health Benefits Program," by Drs. Gray and Selden, in the Journal of Risk and Insurance 69(2), pp. 209-224, 2002.
Reprints (AHRQ Publication No. 02-R090) are available from the AHRQ Publications Clearinghouse.
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