A selection argument for the Medicaid expansion private option

The following interesting idea arose this morning in email correspondence with Adrianna McIntyre of the Project Millennial blog.* One concern about the ACA exchanges is that some of them will experience adverse selection. This could happen if enough relatively healthy individuals do not comply with the mandate, making the pool of enrollees into exchange plans relatively sicker. That would drive up premiums and the federal liability for subsidies.

Subsidies reduce the risk and degree of adverse selection, but nobody knows by how much. It probably varies by state, commensurate with variation in the culture of acceptance of the ACA and its mandate. Of course, the higher the subsidy, the more likely an individual is to enroll when healthy. So, another way to reduce adverse selection and its cost is to allow exchange access to people who would be subsidized at an even higher rate. The Medicaid expansion population does the trick. So, there’s a selection-based argument for the Arkansas style “private option.”

It may be true that would-be Medicaid enrollees are sicker than non-Medicaid enrollees, on average. But that’s not the relevant comparison. What’s relevant is how they compare to exchange enrollees. If they’re healthier, on average, than those who self-select into the exchange, then they reduce the pool’s risk rating, the premiums therein, and the federal liability for subsidies. This is a cost offset to the private option I have not yet seen raised elsewhere.**

At some rate of health status-based mandate violation, it must be true that the Medicaid population is healthier than those choosing to take up an exchange product. If you think there is a reasonable chance of a high rate of lack of compliance with the mandate in Arkansas or any of the other states considering the private option, that increases its attractiveness because it reduces the difference in cost compared to an expansion of traditional Medicaid.

* Adrianna, in turn, credits the origins of the thread to an anonymous colleague.

** As premiums come down, more unsubsidized individuals are likely to find enrolling in exchange plans a valuable option too. So this doesn’t just benefit the government.


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