Adverse Consequences of Adverse Selection

Abstract

The turnabout in public opinion about managed care has been espe-cially striking. In the space of only a few years, managed care went from being the centerpiece of many proposals for health reform to being the target of legislative action that forbids it the managerial actions that constitute its essence. What happened? Were the initial mem-bers of managed care plans overly accepting of restrictions they later discovered to be oppressive? Did plans change over time to become more aggressive? Or, is the controversy only political? We wish to sug-gest that there was more to the backlash than political mobilization of a few inevitable malcontents; rather, neither initial buyers nor original plans changed their views or behavior. Instead, a crucial part of the change, and a potential cause of the backlash, was a change in the kinds of people who were joining managed care plans.1 The changes we will highlight are different from the kinds that can be easily brought into the policy analytical framework because they represent transfers among different sets of insured persons. The policy process must address the much more vexing question of who should gain and who should lose, with the total approximately constant. The source of this difficult prob-lem, as with so many other problems in health insurance, is adverse selection