Plan Sorting Under Risk Adjustment and Premium Discrimination in Health Insurance Exchanges

Abstract

In the new state-run Health Insurance Exchanges created as part of the Affordable Care Act (ACA), plans with different benefit coverage of health care costs are provided in order to expand consumer choices and increase consumer welfare. According to the ACA, premiums can differ based on enrollees’ characteristics and are risk-adjusted before returning to insurance plans in these markets. This paper analyzes how risk adjustment and premium discrimination affect consumers’ choices of plans theoretically and empirically. I develop a model to show that both risk adjustment and premium discrimination encourage consumers to enroll in plans with high benefit coverage under plausible assumptions. I simulate the equilibrium sorting using data for the Exchange-eligible population drawn from the Medical Expenditure Panel Survey. I also simulate the consumers’ plan choices under different scenarios of risk adjustment, and calculate the corresponding welfare effect.