Simulation of a Health Insurance Market with Adverse Selection

Roger D. Feldman and Bryan E. Dowd
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Roger D. Feldman: University of Minnesota, Minneapolis, Minnesota
Bryan E. Dowd: University of Minnesota, Minneapolis, Minnesota

Operations Research, 1982, vol. 30, issue 6, 1027-1042

Abstract: A health insurance market is examined in which individuals with a history of high utilization of health care services tend to select fee-for-service (FFS) insurance when offered a choice between FFS and health maintenance organizations (HMOs). In addition, HMOs are assumed to practice community rating of employee groups. Based on these observations and health plan enrollment and premium data from Minneapolis-St. Paul, a deterministic simulation model is constructed to predict equilibrium market shares and premiums for HMO and FFS insurers within a firm. Despite the fact that favorable selection enhances their ability to compete with FFS insurers, the model predicts that HMOs maximize profits at less than 100% market share, and at a lower share than they could conceivably capture. That is, HMOs would not find it to their advantage to drive FFS insurers from the market even if they could. In all cases, however, the profit-maximizing HMO premium is greater than the experience-rated premium and, thus, the average health insurance premium per employee in firms offering both HMOs and FFS insurance is predicted to be greater than in firms offering one experience-rated plan. The model may be used to simulate the effects of varying the employer's method of contributing to health insurance premiums. Several contribution methods are compared. Employers who offer FFS and HMO insurance and pay the full cost of the lowest-cost plan are predicted to have lower average total premiums (employer plus employee contributions) than employers who pay any level percent of the cost of each plan.

Keywords: 131 model of health insurance market with adverse selection; 271 adverse selection in health plan choice; 762 deterministic simulation model of health insurance market (search for similar items in EconPapers)
Date: 1982
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Citations: View citations in EconPapers (19)

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