Imperfect risk adjustment,risk preferences,and sorting in competitive health insurance markets |
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| Affiliation: | 1. RAND Corporation, United States;2. School of Public Health, University of California, Berkeley, United States;1. Duesseldorf Institute for Competition Economics (DICE), Heinrich Heine University, Germany;2. TILEC and Department of Economics, Tilburg University, The Netherlands;1. Boston University, Department of Economics, United States;2. Harvard Medical School, Department of Health Care Policy, United States;1. Center for Global Development, 2055 L Street NW, Washington, DC, USA;2. German Federal Social Insurance Office, Bonn, Germany;3. State Chancellery of North Rhine-Westphalia, Düsseldorf, Germany;4. Ludwig Maximilian University of Munich, Faculty of Economics, Ludwigstrasse 33, Munich, Germany |
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| Abstract: | I develop a model of insurer price-setting and consumer welfare under risk-adjustment, a policy commonly used to combat inefficient sorting due to adverse selection in health insurance markets. I use the model to illustrate graphically that risk-adjustment causes health plan prices to be based on costs not predicted by the risk-adjustment model (“residual costs”) rather than total costs, either weakening or exacerbating selection problems depending on the correlation between demand and costs predicted by the risk-adjustment model. I then use a structural model to estimate the welfare consequences of risk-adjustment, finding a welfare gain of over $600 per person-year. |
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| Keywords: | Health insurance Adverse selection Risk adjustment |
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