Question About Employer Risk Selection

I’ve received some questions from readers via the website contact form. In general I prefer that questions or comments about a post be submitted as a comment to that post so that everyone can see it. I’m far more likely to respond that way.

Just to answer the individual who asked if employers can select the good risks and send the bad to an exchange. I see a way that could occur by benefit design. An employer could deliberately design a benefit package so that it doesn’t appeal to high risk individuals (e.g., severe restrictions on providers, poor coverage for certain conditions, etc.). If that benefits package doesn’t meet the criteria for minimum generosity then that employer’s workers would be eligible for the exchange.

But in that case all that employer’s workers would be. To keep the good risks to itself the cost of the employer’s plan to those good risks would have to be better than they could get in an exchange. Also, the employer would pay the penalty.

Though this is possible I think as a practical matter it won’t occur in everywhere and may not occur with great frequency (but I don’t know for certain). In general employers have to offer compensation packages that are competitive in the marketplace. An employer that deviates from its competitors enough will in time get the lowest productivity workers, putting it at a competitive disadvantage. It won’t be practical for every employer to game the system in this way, but some might be able to.

So, I think this is a potential issue for the exchange and could drive up premiums there, thus costing tax payers more. The problem is all the more likely since the Senate’s employer penalty is so low. That all shows that things would be far better if everyone were in the exchange. It is my understanding that over time large employers will gain access to the exchange. Maybe that will help.

Great question!

Later: Actually I don’t think selection is an issue for another reason. Insurance through an employer will be vastly cheaper than the exchange due to the tax exemption of employer-based insurance. That will keep many folks from switching even if the benefits in the exchange are better.

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