Since the implementation of the Affordable Care Act (ACA), also known as ObamaCare, the government has been trying to encourage Americans to obtain health insurance. Millions of Americans have, but many have not. Understandably, those who have chosen not to obtain insurance are those individuals who least use health insurance. Unfortunately, that drives up the cost for those who are insured.

Understanding Adverse Selection

Insurance companies are always concerned with a phenomenon called “adverse selection.” Adverse selection in health insurance occurs when more sickly people than healthy people purchase coverage so that the insurance company must pay more for the sickly people’s medical expenses.  Insurance companies charge premiums based on the average payout per covered enrollee.  This means that healthier people will pay more money in premiums than they receive in benefits payouts.  The opposite is true for the sicker and more expensive enrollees: they pay less in premiums than they receive in benefits payouts.  When many sick people sign up for coverage and not many healthy people sign up (adverse selection), the customer base skews toward higher average payouts, which forces insurance premiums to increase for all customers.

In the case of ObamaCare, there was a concern that only the sickest Americans would take advantage of the new program and that would cause premiums to rise for everyone. The administration hoped that by creating a mandate requiring that everyone, both sickly and healthy, must purchase health insurance, they could create a market similar to vehicle insurance, where most everyone has insurance and the diversity evens out the premium rates. However, even with the mandate and accompanying tax penalty, there are signs that not everyone is interested in having health insurance.

According to the final report from the Department of Health and Human Services department on the 2013 open enrollment period, more than 8 million Americans enrolled in a Marketplace insurance plan. Only 84% of those who purchased a plan are between 18 and 34 years of age, the age group that is usually the healthiest and least expensive to insure.   Prior to the ACA, young adults were the group least likely to have medical insurance. Ideally, their enrollment in the Marketplace will  help balance costs for insurance companies.

Enrollment by Demographic and Plan Type (Bronze, Silver, Gold) Metal Level

Certain demographic groups have signed up for coverage more quickly than others and there are differences in the types of plans (Bronze, Silver, Gold, and Platinum) that enrollees prefer. The Marketplace enrollment was slightly skewed toward females, with 54% of selections made by women. Women make up 50% of the non-elderly (under 65 years old) population of the United States.

By age, 28% of enrollees were Americans between the ages of 18 and 34. As expected, younger Americans waited until near the end of open enrollment to select health insurance plans. In December, there was a strong surge of sign-ups within this age group, and there was another surge in March, when the number of young adults selecting a plan doubled.

As expected, the overall age range of participants in the Marketplace has skewed quite a bit older than the overall U.S. population. 48% of non-elderly adults who selected a plan were older than 45, but that age group comprises only 32% of the uninsured population.

Not surprisingly, most Americans are opting for a Silver plan in the Marketplace. This mid-level plan gives a balance of coverage and cost-sharing, and premium subsidies and cost-sharing reduction assistance is tied to these plans. 65% of Marketplace enrollees chose a Silver plan. Bronze plans, which offer lower monthly costs but higher cost-sharing, comprised 20% of selections. Gold plans, with higher monthly costs and less cost-sharing, comprised 9% of enrollment. Finally, just 5% of enrollees chose a Platinum plan, which generally has the highest premiums and lowest cost-sharing.

Approximately 85% of Marketplace enrollees received some kind of financial assistance with their plan, either with monthly payments, cost-sharing, or both.

Insurers will be reviewing the demographic information of their enrollees and analyzing the limited claims data they receive before 2015 premium rates must be filed. These rates will provide a better sense of whether enough young adults enrolled in coverage to mitigate the negative effects of adverse selection. Any premium increases may cause even more relatively healthy Americans to opt out of the plans, as they become less affordable, causing additional cost increases. However, if insurers determine that a strong cross-section of Americans enrolled in the Marketplace and if insurance companies have predictable payouts over time, premiums may stabilize and the ACA may yet reach its goals.