Should-Read: Michael Geruso and Timothy Layton: Selection in Health Insurance Markets and Its Policy Remedies: "We begin by outlining some important but often misunderstood differences between two types of conceptual frameworks... http://www.nber.org/papers/w23876
...The fixed-contracts approach... views selection as influencing only insurance prices in equilibrium. The... endogenous contracts approach treats selection as also influencing the design of the contract itself, including the overall level of coverage and coverage for services that are differentially demanded by sicker consumers.... We discuss four commonly employed policy instruments....
- premium rating regulation, including community rating;
- consumer subsidies or penalties to influence the take-up of insurance;
- risk adjustment; and
- contract regulation.
We discuss these policies with reference to two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage and the individual insurance markets reformed by the Affordable Care Act of 2010...