RAND Roybal Center for Health Policy Simulation

Adverse Selection, Population Aging, and the Market for Supplementary Health Insurance

Objectives

To show an alternative mechanism by which adverse selection in the Medigap market may arise: population aging. Previous studies have examined the market at a single point in time, holding constant the population age distribution (reasonably so). However, it is well known that the population age distribution is not in steady state, but is undergoing long-term population aging. Moreover, the upper part of the age distribution will begin changing shape quite rapidly as the Baby Boom generation moves into older ages. Using a simulation analysis, we show that as the population ages, average premiums will necessarily rise in community rated plans to reflect the higher proportion of older (i.e., higher risk) individuals to the plan population (see Figure 1). As prices rise, the healthiest individuals may either drop out of the market or choose not to enter in the first place, triggering a spiral of rising premiums, which could eventually lead to the disappearance of the market. This effect may be exacerbated by the presence of an alternative, lower cost source of supplementary coverage in the form of Medicare HMOs.

 Figure 1. Premiums relative to inelastic Baseline(s). Demand elasticity: -1. Adverse selection.

Progress to Date

We've completed a preliminary run of our simulation analyses, and are now investigating the effect of various assumptions, testing different specifications of the model. Specifically we've simulated the evolution of premium growth over time with and without population aging. We have also simulated the effect of population aging on the fraction insured, and are experimenting with different assumptions about demand elasticities and selection in and out of the market.

Research Products

We have a partial draft of a paper.

Next Steps

Our next steps are to finish the simulations; resolve anomalies; and finish the write-up of the paper.