For anyone interested in why the lack of sufficient risk adjustment will doom everyone to bad health insurance, I recommend this primer about risk adjustment from the Dutch Ministry of Health, Welfare and Sport. The Dutch health care system is probably the closest useful model to what Congress is trying to achieve with the new health insurance exchange. It says:
Risk adjustment is sometimes called the Achilles heel of the health care system. Provided that risk adjustment works properly, it is possible to reap the benefits of managed competition. If risk adjustment does not work properly, preferred risk selection will be rewarded instead. This may disadvantage vulnerable groups in society such as the chronically ill and the elderly, for whom a health insurer will not receive adequate compensation. Therefore, it is crucially important to compensate health insurers adequately through the risk adjustment system for identifiable groups of insured persons with predictably high care costs and vice versa.
To give you an idea of how robust the Dutch risk adjustment mechanisms are, just over half of all money spent on health insurance goes toward the risk adjustment health insurance fund. That is substantially more than what is proposed in any of the bills in Congress. The Dutch have a long history of using risk adjustment mechanisms in their health insurance and understand how critical the issue of adverse selection is to a working health care system.
The recent CBO report and the CMS report should be a powerful wake up call. The CMS concluded that a robust public option tied to Medicare rates would be so much cheaper that it could afford to absorb the 7% increase in cost due to adverse selection, and still provide high-quality, lower-cost health insurance. The weaker, negotiated rates public option would be only somewhat cheaper and be less able to easily absorb the flood of sick people who would be treated badly by for-profit insurance. Without much stronger risk adjustment mechanisms like the Dutch implemented in their system, no socially responsible insurance plan (be it public, private, or non-profit co-op) can survive with this problem of adverse selection. This is our Achilles heel which will insure health care reform creates bad health insurance for everyone on the exchange.