Reinsurance, Repayments, and Risk Adjustment in Individual Health Insurance

Thomas G. McGuire, Sonja Schillo and Richard C. van Kleef

American Journal of Health Economics, 2020, vol. 6, issue 1, 139 - 168

Abstract: Reinsurance can complement risk adjustment of health plan payments to improve fit of payments to plan spending at the individual and group level. This paper proposes three improvements in health plan payment systems using reinsurance. First, we base reinsurance payments on spending not accounted for by the risk adjustment system, rather than just high spending. Second, we propose pairing reinsurance for individual-level losses with repayments for individual-level profits. Third, we optimize the weights on the risk adjustors taking account of the presence of reinsurance/repayment. We implement our methodology in data from Germany, the Netherlands and the US Marketplaces, comparing our modified approach to plan payment with risk adjustment as currently practiced in the three settings. The combination of the three improvements yields very substantial improvements in the individual-level fit of payments to plan spending in all three countries.

Date: 2020
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