By Lisa Marino
More than ever employers who sponsor group health insurance plans are faced with the challenge of rising health insurance costs impacting both employers and employees. Among the wide variety of factors that can contribute to increasing health plan costs is adverse selection.
What is Adverse Selection? Also referred to as anti-selection, adverse selection occurs when enrollees in a health plan elect coverage that best suits them, such as in a multiple plan offering when less healthy members elect a richer plan while younger healthier members elect a cheaper plan or forgo coverage altogether. Under these circumstances, funding for the healthcare plan may not be set appropriately to reflect the risk, and a corrective pricing action should be expected.
In addition to pricing adjustments, employees will likely be affected with potential increases to their employee contributions. Consequently, an employer may be faced with employee retention risk. Market benchmark analyses should be performed regularly to compare current benefits, cost structure and contribution strategy to peers in order to avoid retention risk as well as understand how other groups may be mitigating adverse selection risk.
Enrollment Strategy, Participation and the Bottom Line
Fortunately, employers can reduce adverse selection, achieve adequate spread of risk and improve their bottom line by implementing a comprehensive enrollment strategy that includes clear, consistent employee communication, access to technology, and a strategic contribution plan.
Communication
Effective communication can be a major driver of participation and managing the risk of adverse selection. Benefit materials should be easy to read and understand. Clearly communicating the impacts of benefit enhancements as well as any applicable benefit changes can be the difference between someone enrolling and not enrolling. Communications should be sent to employees at regularly scheduled intervals to acknowledge and explain benefits and the enrollment process. For those who do not speak English, multilingual communications should be provided.
Boosting participation begins long before open enrollment. Ahead of benefits season, HR could conduct employee surveys to get an understanding for what types of benefits employees want, and how the current offerings are meeting or not meeting their needs. By involving employees early on, you can increase your chance of improving engagement during open enrollment which can aid in managing adverse selection risk.
Technology
An online enrollment platform is always preferable and expected in today’s age of rapidly advancing technology. Consider online benefit tutorials requiring employees to review their benefits and acknowledge their review. Online decision support tools can also be provided to help employees with their benefit buying decisions. These technology solutions will allow employees to easily enroll in the appropriate benefit plans which can lead to higher overall participation and mitigate the impact of adverse selection.
Contribution Strategy
Employee contributions play a key role in helping employers avoid adverse selection. If premiums or gross cost developments take into account selection concerns but employee contribution strategy ignores these factors, adverse selection can result in unanticipated healthcare costs for the company. The employer must take into account how its contribution strategy might be affecting selection in the plans in order to help mitigate potential adverse selection risk.
High Deductible Health Plans (HDHPs) are a great way to curb cost trends as well as offer lower cost options for all employees. One way employers make these high deductible plans more attractive, is to contribute a set amount to a tax-advantaged, rollover account in the employee’s name thereby reducing the burden of the high deductible and the employee’s overall out-of-pocket costs. These accounts are becoming popular among income earners of all levels because of the tax advantages they offer.
A strategic employee contribution structure can help an employer steer its employees to their preferred plan design. An employer may have a preference for a particular plan in which it wants its employees to enroll based on cost or ease of administration.
Conclusion
Without proper consideration for a strategic plan around employee contributions and enrollment by plan considerations, adverse selection can have detrimental effects on any health plan. Being aware and understanding the risks and developing a multi-year strategy can lead to more accurate budgeting and cost control. Having well-rounded employee benefits plan designs, a well thought out contribution strategy, good communication and an easy-to-use enrollment solution is key to averting the cost burden that adverse selection may present.
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Group Life and Health Senior Underwriter
McGriff