Imperfect risk adjustment, risk preferences, and sorting in competitive health insurance markets

Timothy Layton

Journal of Health Economics, 2017, vol. 56, issue C, 259-280

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.

Keywords: Health insurance; Adverse selection; Risk adjustment (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:56:y:2017:i:c:p:259-280

DOI: 10.1016/j.jhealeco.2017.04.004

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