Using Taxes to Support Multiple Health Insurance Risk Pools

Abstract

In most markets, it is considered desirable for consumers to have more choices. But health insurance regulation is different. When it comes to health insurance, giving consumers more choices can result in the market collapsing — leaving the sickest and most needy consumers without any good choices at all. To mitigate this problem, the Affordable Care Act’s Exchanges were designed around maintaining a single exchange-based risk pool. However, one problem with this approach taken by the Affordable Care Act is that the regulations designed to maintain the single exchange-based risk pool have the side effect of limiting some potentially positive aspects of consumer choice and provider competition.

Might there be a way for us to have our cake and eat it too? Could reforms limit adverse selection while also fostering more innovation through market incentives? Our tentative answer is yes. This essay explains how targeted use of taxes and subsidies, by either the federal government or by state governments, could support multiple health insurance risk pools while still limiting adverse selection.

Keywords: affordable care act, adverse selection, health care tax

JEL Classification: K34, I11