Demand elasticities and service selection incentives among competing private health plans

Randall Ellis, Bruno Martins and Wenjia Zhu

Journal of Health Economics, 2017, vol. 56, issue C, 352-367

Abstract: We examine selection incentives by health plans while refining the selection index of McGuire et al. (2014) to reflect not only service predictability and predictiveness but also variation in cost sharing, risk-adjusted profits, profit margins, and newly-refined demand elasticities across 26 disaggregated types of service. We contrast selection incentives, measured by service selection elasticities, across six plan types using privately-insured claims data from 73 large employers from 2008 to 2014. Compared to flat capitation, concurrent risk adjustment reduces the elasticity by 47%, prospective risk adjustment by 43%, simple reinsurance system by 32%, and combined concurrent risk adjustment with reinsurance by 60%. Reinsurance significantly reduces the variability of individual-level profits, but increases the correlation of expected spending with profits, which strengthens selection incentives.

Keywords: Health insurance; Risk selection; Risk adjustment; Reinsurance; Health care demand elasticities (search for similar items in EconPapers)
JEL-codes: C21 D12 I11 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:56:y:2017:i:c:p:352-367

DOI: 10.1016/j.jhealeco.2017.09.006

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