Posted on May 9, 2006

Proof that insurers selectively advertise to healthy


The Relationship Between Health Plan Advertising And Market Incentives:
Evidence Of Risk-Selective Behavior

Health Affairs
May/June 2006

By Ateev Mehrotra, Sonya Grier and R. Adams Dudley

Previous Medicare managed care efforts were undermined by risk selection or “cream skimming,” in which health plans selectively enrolled healthier patients and avoided sicker ones.

Most of the time, health plans are paid a fixed premium for each enrollee, regardless of the enrollee’s health status. In such a situation, patients with chronic illnesses are a potential financial liability, because they are more likely to incur high costs. Compared with reducing costs or improving quality, risk selection is a relatively easier mechanism for health plans to increase profits. A substantial body of research demonstrates that Medicare managed care enrollees are, on average, healthier than Medicare fee-for-service (FFS) enrollees. Provisions in MMA attempt to deter risk selection, but there is concern that these provisions are insufficient and that health plans will still have an incentive to engage in risk selection.

Some believe that health plans actively recruit healthier patients through advertising, but this has never been empirically demonstrated. Others believe that health plans deliberately structure their benefits so that sicker patients voluntarily leave the plan. However, since risk selection is seen even at the time of initial enrollment, pre-enrollment factors such as advertising probably contribute to it a great deal.

We found that the use of ads that are attractive to healthy patients increased nationally from the 1970s through the 1990s as HMOs became more common and gained market share. Furthermore, in 2000, the use of such ads was more common in markets with higher HMO market share than in those with lower market share.

These correlations suggest that as competition increases, health plans attempt to risk-select through advertising.

…health plans spent more than $70 million on newspaper advertising alone in 2000. The total advertising budget is much higher if all media types are included. Our findings imply that health plans are using that advertising to attract healthier patients. From a societal and clinical perspective, these resources are being misused.


By Don McCanne, M.D.

Advocates of free markets insist that competition between private health plans (e.g., Medicare Advantage) will always result in lower costs than is possible through a single public insurance program (e.g., traditional Medicare). All evidence to date indicates that this is simply not true. The government spends more per Medicare beneficiary in private plans than it does for Medicare beneficiaries, with equivalent health status, in the traditional public program.

One reason that private plans may spend more is the inclusion of pharmaceutical benefits. A much more important reason is the very high administrative costs plus profits that are not characteristic of the public Medicare program. The meme that markets always produce relatively lower prices through greater efficiency has been disproved when applied to health insurance.

Health insurance has a unique feature which allows the administrators to reduce prices without the necessity of increasing efficiency. That feature is risk pooling. If insurance administrators can keep higher risk individuals out of the pool that they are insuring, then costs per beneficiary can be reduced.

This study is important because it confirms, through objective evidence, what we’ve surmised all along. Private insurers are targeting their advertising to a healthy subset of the population.

Where do we draw the line? Is this merely smart business practice in the private market? Or is this a dishonest effort to shift a significant portion of the costs of health care to purchasers of other plans and to the taxpayers through public programs? Whether it’s labeled smart business or a method of cheating the rest of us, it’s clearly wrong!

Some contend that the answer is in risk adjustment, but prior efforts have been feeble or ineffective. Regardless, the success of the private insurance industry primarily has been due to the ability to keep patients with significant needs out of their risk pools. If we are ever successful in ending this perversity of risk pool manipulation, the private insurers will have to charge premiums that will price them out of competition with a publicly-administered program such as Medicare.

It is ironic that an equitable system would require private insurers to charge premiums that are so high that they would result in a death spiral, requiring them to withdraw from the market. But isn’t that the way markets are supposed to work?