Adverse Selection in Health Insurance Coverage of High-Cost Cures

Abstract

The following paper examines adverse selection concerns facing health insurance companies from the coverage of high-cost, but highly-effective, cures for chronic diseases. This problem has arisen over the past several years with the development of Sovaldi, a cure for hepatitis C. However, it will become more prevalent as more expensive cures, particularly gene therapies, are developed and come to market. Health insurers, when deciding to cover the expensive cures, incur the risk that a disproportionate number of high-cost individuals will enroll in their plan while they are ill, but leave once they are cured and healthy. This adverse selection problem may lead health insurers to avoid risking this possibility, and as a result not cover the cures at all. Policymakers have posited several solutions to address this market failure. One potential policy solution is the establishment of a risk-stabilization program for insurance plans that cover these therapies. This risk-stabilization program would de-risk the potential adverse selection and allow chronically ill patients to access revolutionary, curative therapies. A second potential policy solution is the institution of annuity-like “pay-for-performance” models in which insurers pay for expensive but curative treatments over several years, contingent on the treatment’s performance.