The Three Adverse Selection Management Tools
- 1Contribution strategy: Price each plan to reflect its actuarial value — charge more for richer plans
- 2Decision support tools: Help employees understand their expected total cost under each plan option
- 3Plan design: Make the HDHP genuinely attractive — employer HSA contribution, $0 preventive care, low telemedicine copay
Monitoring Enrollment Patterns
Monitor enrollment patterns annually to identify adverse selection. Warning signs include: the rich plan's enrollment growing faster than the lean plan's, the rich plan's claims PEPM increasing faster than the lean plan's, and healthy employees leaving the rich plan for the lean plan. These patterns suggest adverse selection is occurring and contribution strategy adjustments are needed.
The Death Spiral
Watch Out
The "death spiral" occurs when adverse selection concentrates sick employees in the rich plan, driving up its cost, which causes healthy employees to leave for the lean plan, which further concentrates sick employees in the rich plan, which drives up its cost further. The death spiral can make the rich plan unaffordable within 3–5 years. Proactive contribution strategy management is the only way to prevent it.