Adverse Selection

Adverse selection means that one side in a negotiation has more information than the other and can use that difference to their advantage.

The most common way that adverse selection is referred to in health insurance is the rumor that high risk individuals and those with expensive care needs will move to the state or federal insurance programs driving up costs.

An insurance company issues a quote based on a census of the customer company’s employees.  This is the information it holds for the negotiation.  Adverse selection comes into play when the demographics of the company don’t accurately reflect the near-future state of health of the employees due to new hires or a new diagnosis to a current employee.  So, beyond the census information gathering, insurance companies further protect their own financial interest by limiting coverage or raising premiums on everyone.  Of course, these are a negative consequence for the buyers.

For self-insured companies, the same census-to-reality risk factors exist.  Typically large employers or companies with young demographics trend toward self-funding their insurance because of the lower perceived risk.  However, just one or two high value claims can upset the financial apple cart.   And the number of number of $1,000,000+ claims has doubled in just 4 years.  The top diagnosis categories for these claims include cancer, heart disease, neonatal intensive care, and trauma, such as motor vehicle accidents.

Purchasing stop loss insurance is a way for self funded plans to mitigate risk of adverse selection.  High value claims or high overall health costs can be paid by the stop loss carrier if thresholds written into the policy are met.


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    In 2011, the top 5 most expensive medical conditions treated in US hospitals were: Septicemia, Osteoarthritis, Complication of device, implant or graft, Liveborn, and Acute myocardial infarction

    From 2010 to 2013, the number of claims that were individually $1 million or above rose by 1,000%

    In 2017 approximately 18% of the American public will purchase insurance through exchanges, radically transforming the health insurance landscape.

    In 2014, 98% of large firms (= 200 Workers) offer 1+ wellness programs to their employees.

    The most costly 1% of patients account for 20% of national health expenditures – accruing average annual expenses of nearly $90,000 per person.

    6% of firms offering fully-insured plans report they intend to self-insure because of Obamacare.

    In 2014, PPO plans remained the most common plan type, enrolling 58% of covered workers.

    In 2012, 93% of businesses with 5,000+ employees and 80% of companies with 1,000-4,999 employees were self-funded

    Massachusetts has the third-highest prevalence of self-funded insurance in the small-group market (Fewer than 50 employees).

    In 2013, the average deductible was $2,906 for individuals selecting plans from marketplaces. This compares with average deductibles of $1,135 for an individual with employer coverage.

    In 2013, the average annual premiums for employer-sponsored health insurance are $5,884 for single coverage and $16,351 for family coverage, up 5% and 4% respectively from 2012.

    From 2010 – 2013, cancer followed by chronic/end stage renal disease and leukemia accounted for the top 3 costliest illnesses.