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Market Rules and Adverse Selection: A Background Paper

August 16, 2011

The Affordable Care Act (ACA) requires states to either establish and operate a Health Insurance Exchange by 2014 or participate in the federal Exchange. On April 12, 2011, Governor O’Malley signed the Maryland Health Benefit Exchange Act of 2011, which established Maryland’s Exchange as an independent unit of the state government. The Act also established a Board of Trustees to oversee the Exchange. The Hilltop Institute was commissioned to develop a series of background papers in order to assist the Board in planning for the implementation of Maryland’s Exchange.

This paper provides some basic background on how the health insurance market as a whole may respond to the collection of regulatory and structural changes that are envisioned under the ACA. It focuses first on the nature of and implications for adverse selection effects that may skew health plan enrollment, both inside and outside an Exchange. The paper includes a brief description of the insurance market in Maryland to establish a sense of the scale of participation inside and outside Maryland’s Exchange. This paper also introduces key components of ACA regulation that are intended to mitigate the financial risk for carriers operating within an Exchange in order to help provide a context for the collection of facets that Maryland will need to consider as its Exchange is established.

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