Reinsurance, Repayments, and Risk Adjustment in Individual Health Insurance: Germany, The Netherlands and the U.S. Marketplaces

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

No 25374, NBER Working Papers from National Bureau of Economic Research, Inc

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 U.S. 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.

JEL-codes: I10 I11 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-hea and nep-ias
Note: EH
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Citations: View citations in EconPapers (1)

Published as Thomas G. McGuire & Sonja Schillo & Richard C. van Kleef, 2020. "Reinsurance, Repayments, and Risk Adjustment in Individual Health Insurance," American Journal of Health Economics, vol 6(1), pages 139-168.

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