BUSI 629 Week 5 Discussion Board Forum 5 Example

Discussion Board Forum 5: Insurance, Risk and Selection

BUSI 629 Economic Analysis in Healthcare, Discussion Board Forum 5

Thread by [Student Name]

The hospital, its patients and the classmates are composites; the textbook and the peer-reviewed sources cited are real.

Every January, our hospital's case managers notice the same pattern. Patients who were diagnosed during the previous year with heart failure, dementia or kidney disease, and who were enrolled in Medicare Advantage plans, switch to traditional Medicare, often with a Medigap supplement. Some tell us they want to see the cardiologist or nephrologist outside their plan's network; others are tired of prior authorizations. Our finance team noticed that the patients leaving Medicare Advantage plans tend to be our most expensive ones, while new enrollees joining those plans each fall are, on average, younger and healthier. Over three years, about 9% of our patients with a new heart failure diagnosis made the switch, compared with roughly 3% of all Medicare patients we see. This week's chapters give a name to what we are seeing: selection.

Lee (2015) explains that insurance works by pooling risk: many people pay premiums so that the few who become seriously ill can be covered. Pooling breaks down when people use private knowledge of their own health to buy more coverage when they expect to be sick and less when they expect to be well, the pattern economists call adverse selection. The reverse, favorable selection, occurs when an insurer attracts people who are healthier than average, or than its payment assumes. Medicare's design makes both possible because beneficiaries choose each year between traditional Medicare and private Medicare Advantage plans, which are paid a risk-adjusted amount per enrollee. If healthier people join Medicare Advantage and sicker people leave it, the plans are paid more than their enrollees would have cost in traditional Medicare, while traditional Medicare's pool grows sicker.

Recent studies measure the pattern. Meiselbach et al. (2026) followed more than one million Medicare Advantage enrollees from 2016 to 2021 and compared those who developed a new complex condition in 2019 with those who did not. Developing any new complex condition raised the probability of leaving the plan by 3.3 percentage points, including 2.8 points for moves to traditional Medicare, and the effect grew with complexity, from 1.4 points for one new condition to 12.8 points for four or more. Moves to traditional Medicare were 1.5 points higher in states that guarantee access to Medigap and limit how much Medigap insurers may vary premiums by health. Bozzi et al. (2026) used encounter data for 1.4 million Medicare Advantage enrollees to estimate favorable selection, the extent to which enrollees cost less than their risk scores predict, and found it ranged from 4.9% to 5.8% of costs from 2020 to 2022, lower than estimates based only on people who switched from traditional Medicare but still substantial.

Selection has three consequences. For federal spending, favorable selection means the government pays plans more than it would have spent on the same people in traditional Medicare. For traditional Medicare, the arrival of sicker patients raises average costs and, with them, Medigap premiums. For our hospital, the shift changes payer mix in ways that matter: patients with complex conditions who move to traditional Medicare bring fewer authorization requirements but also Medicare's fee-for-service rates, while our Medicare Advantage contracts carry the healthier patients. None of this means Medicare Advantage plans are acting improperly; much of the selection arises from beneficiaries' own choices and from features of plan design. But the payment system does not fully correct for it, and that matters to every party. I recommended that our finance team track switching among our high-cost patients each January and model its effect on revenue, and that our case managers give patients neutral information about both options rather than steering them. Selection is invisible in any single patient's choice but decisive in the totals, which is why managers need to watch the totals.

Reply to Lucia

Lucia, your thread argued that people leave Medicare Advantage after a serious diagnosis mainly because of prior authorization burdens. Prior authorization surely matters, but network design appears to be another major driver, especially for cancer, where patients often want care at a specific center their oncologist recommends. Achola-Kothari et al. (2026) linked cancer registry data to plan networks for 24,444 Medicare Advantage enrollees newly diagnosed with cancer in 2019 and measured how many accredited cancer facilities and designated cancer centers in each area were in network. Among enrollees in nonemployer plans that charged premiums, a 10-percentage-point increase in network breadth was associated with a 4.5-point lower probability of switching plans, while network breadth was not associated with switching for employer or retiree plans, probably because employer subsidies made staying worthwhile. Enrollees in narrow networks were younger and more likely to be Black. Lee (2015) notes that insurers can influence which risks they attract through benefit design, and network breadth is a powerful design tool: a plan that leaves out major cancer centers will tend to lose members who develop cancer. That pattern adds to favorable selection without any explicit choice to avoid sick patients, which makes it hard to regulate directly. It also suggests that the burden falls unevenly, since the narrow-network plans enrolled more Black and younger beneficiaries, who may have chosen them for low premiums without anticipating a cancer diagnosis. Plan comparison tools rarely show network breadth for specialty care clearly, so beneficiaries cannot easily weigh it at enrollment. I would suggest your organization ask which local plans include its oncology services, since a narrow network can push your own patients to switch coverage just when continuity matters most, and help them compare plans before the next enrollment period, using the state's insurance counseling program if your staff cannot advise directly.

Reply to Grant

Grant, your thread proposed adding an out-of-pocket maximum to traditional Medicare, since Medicare Advantage plans have one and traditional Medicare does not, and you argued it would end the financial reason sick people need Medigap. A recent microsimulation shows both the appeal and the cost. Ryan et al. (2026) projected the effects of caps of $3,000, $5,000 and $10,000 a year in traditional Medicare from 2026 to 2034. A $3,000 cap would lower average beneficiary spending by $1,568 a year, but it would raise Medicare spending by about $96 billion over the period, compared with $70 billion for a $5,000 cap and $39 billion for a $10,000 cap. Lower caps would shift substantial numbers of beneficiaries from Medicare Advantage to traditional Medicare. Lee (2015) explains that reducing out-of-pocket costs also raises use through moral hazard, and the model included those behavioral responses. The selection effect matters too, and it is the part of your proposal most connected to this week's chapters: if a cap draws people back to traditional Medicare, the remaining Medicare Advantage pool may become healthier still, increasing favorable selection unless risk adjustment improves. The fiscal numbers matter in a constrained budget, since $96 billion over nine years would compete with other Medicare priorities, and Congress would likely ask how to pay for it. Some of the cost might be offset if the cap reduced the need for Medigap and its premiums, but the simulation suggests the net federal cost would remain large. Overall, your instinct to protect traditional Medicare beneficiaries is sound. I would suggest your proposal pair a cap with stronger risk adjustment and a phase-in starting at a higher threshold, which would protect the sickest beneficiaries while limiting the immediate cost and giving policymakers time to measure how much switching the cap actually produces in its first years.

References

Achola-Kothari, E. M., Dusetzina, S. B., Graves, J. A., Stevenson, D. G., & Keohane, L. M. (2026). Access to specialty cancer care and plan disenrollment among Medicare beneficiaries. JAMA Network Open, 9(6), e2618677. https://doi.org/10.1001/jamanetworkopen.2026.18677

Bozzi, D., Caplan, A., Doom, J., Boudreau, E., Hartjes, M., Schwartz, R., Li, Y., Ray, A., & Sylwestrzak, G. (2026). Advancing the measurement of favorable selection in Medicare Advantage: Evidence from encounter data. Health Affairs Scholar, 4(7), qxag182. https://doi.org/10.1093/haschl/qxag182

Lee, R. H. (2015). Economics for healthcare managers (3rd ed.). Health Administration Press.

Meiselbach, M. K., Xu, J., Brown, T., & Polsky, D. (2026). Medicare Advantage beneficiary enrollment decisions following new complex conditions. JAMA Health Forum, 7(8), e262843. https://doi.org/10.1001/jamahealthforum.2026.2843

Ryan, A. M., Dixit, M. N., Maughan, M. M., Meyers, D. J., & Geng, F. (2026). Financial effects of an out-of-pocket cap in traditional Medicare. JAMA Health Forum, 7(10), e263386. https://doi.org/10.1001/jamahealthforum.2026.3386