Adverse Selection Risk-Pool Explorer

Explore how enrolment by people with different expected costs changes a health plan's risk pool, required premium and selection incentive. Compare the plan before and after risk adjustment.

1. Set the population, costs and enrolment

The market contains lower-risk and higher-risk people. Different enrolment rates cause the plan's enrolled population to differ from the wider market.

Eligible population

Higher-risk share of market

The underlying risk mix before enrolment choices.

Lower-risk expected annual cost

Higher-risk expected annual cost

Lower-risk enrolment rate

Higher-risk enrolment rate

Administrative loading

Risk-adjustment strength

The share of the plan's risk difference offset by a transfer or charge.

Eligible market

Lower riskHigher risk

Enrolled plan

People enrolled

Plan average expected cost

Unadjusted required premium

per member per year, including loading

2. Compare the plan with and without risk adjustment

Risk adjustment does not change the market's underlying healthcare costs. It changes the amount retained by a plan by transferring funds toward plans with higher-risk enrolment and charging plans with lower-risk enrolment.

Without risk adjustment

Expected claims per member

Risk-adjustment transfer$0

Required premium

With risk adjustment

Expected claims per member

Transfer per member

Adjusted required premium

3. Test a further withdrawal of lower-risk members

The comparison below reduces lower-risk enrolment by 15 percentage points while holding higher-risk enrolment and expected costs constant. It illustrates the direction of a premium spiral without claiming that every market will follow this path.

Scenario	Lower-risk enrolment	Higher-risk share of plan	Average expected cost	Unadjusted premium
Current inputs
Further lower-risk withdrawal

4. Interpret the result carefully

Risk adjustment does not remove every selection problem

Actual results depend on the risk model, available data, plan design, pricing rules, enrolment behavior and insurer responses. Transfers can reduce plan-level selection incentives without preventing lower-risk people from leaving the overall market.

Pooled expected cost = total expected claims ÷ enrolled members
Required premium = pooled expected cost × (1 + administrative loading)
Illustrative risk-adjustment transfer = strength × (plan average cost − market average cost)

This simplified teaching model uses two risk groups and assumes expected costs are known and constant. It does not predict premiums, profits, equilibrium enrolment or the performance of any real risk-adjustment system. Premium subsidies, benefit design, regulation, competition, reinsurance, provider prices, uncertainty and equity effects are outside the model.