Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection

Jacob Glazer (), Thomas McGuire and Julie Shi ()

No 19998, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops and implements a statistical methodology to account for the equilibrium effects (aka adverse selection) in design of risk adjustment formula in health insurance markets. Our setting is modeled on the situation in Medicare and the new state Exchanges where individuals sort themselves between a discrete set of plan types (here, two). Our "Silver" and "Gold" plans have fixed characteristics, as in the well-known research on selection and efficiency by Einav and Finkelstein (EF). We build on the EF model in several respects, including by showing that risk adjustment can be used to achieve the premiums that will lead to efficient sorting. The target risk adjustment weights can be found by use of constrained regressions, where the constraints in the estimation are conditions on premiums that should be satisfied in equilibrium. We illustrate implementation of the method with data from seven years of the Medical Expenditure Panel Survey.

JEL-codes: I13 I18 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-hea and nep-ias
Note: EH
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Citations: View citations in EconPapers (7)

Published as Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection , Jacob Glazer, Thomas G. McGuire, Julie Shi. in Measuring and Modeling Health Care Costs , Aizcorbe, Baker, Berndt, and Cutler. 2018

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Chapter: Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection (2016)
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