Heres a grossly simplified example.
Lets say a health insurance company was selling a health plan membership for $500 per month.
Even after paying thedeductible, this insurance is still a great deal.
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In an unregulated health insurance market, health insurance companies would usemedical underwritingto venture to avoid adverse selection.
And conversely, insurers with plans that attract healthier enrollees will have to pay into the risk adjustment program.
The federal government publishes a similar document each summer with details for the previous year.
If they didnt enroll, they faced a penalty on their federal tax return.
The increased premiumsrelative to what they would otherwise have beenare a direct result of adverse selection.
In fact, enrollment has increased significantly in recent yearsmostly due to enhancedpremium tax credits, aka premium subsidies.
These states have acted on their own to take this step to prevent adverse selection in their insurance markets.
Rates only increased by a very small amount in 2022 and slightly more in 2023.
Similar single-digit rate changes were applicable in 2024 and 2025.
But again, premium subsidy amounts change each year to keep pace with average benchmark plan premiums.
If those premiums increase, the amount of enrollees' subsidies will also increase.
Before 2021, there was a “subsidy cliff” at 400% of the poverty level.
This helps to prevent adverse selection among higher-income households.
But with the subsidy cliff eliminated, these applicants have access to affordable coverage.
This means people cant wait to buy health insurance until theyre sick and know theyll be incurring healthcare expenses.
All other enrollments have prospective effective dates.
Some states, however, have restricted or eliminated this provision.
That requires a larger subsidy for the older person since their full-price premium is also larger.
This allows insurers to charge more for health plans with a higher actuarial value.
Consumers who want the more robust coverage offered by a gold plan must typically pay more to get it.
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