Measuring Adverse Selection in Managed Health Care

48 Pages Posted: 6 Jan 1999 Last revised: 27 Aug 2022

See all articles by Richard G. Frank

Richard G. Frank

Harvard Medical School; National Bureau of Economic Research (NBER)

Jacob Glazer

Tel Aviv University - Faculty of Management

Thomas G. McGuire

affiliation not provided to SSRN

Date Written: December 1998

Abstract

Health plans paid by capitation have an incentive to distort the quality of services they offer to attract profitable and to deter unprofitable enrollees. We characterize plans' rationing as imposing a show that the profit maximizing shadow price depends on the dispersion in health costs, how well individuals forecast their health costs, the correlation between use in different illness categories, and the risk adjustment system used for payment. We further show how these factors can be combined in an empirically implementable index that can be used to identify the services that will be most distorted in competition among managed care plans. A simple welfare measure is developed to quantify the distortion caused by selection incentives. We illustrate the application of our ideas with a Medicaid data set, and conduct policy analyses of risk adjustment and other options for dealing with adverse selection.

Suggested Citation

Frank, Richard G. and Glazer, Jacob and McGuire, Thomas, Measuring Adverse Selection in Managed Health Care (December 1998). NBER Working Paper No. w6825, Available at SSRN: https://ssrn.com/abstract=141448

Richard G. Frank (Contact Author)

Harvard Medical School ( email )

Department of Health Care Policy
Boston, MA 02115
United States
617-432-0178 (Phone)
617-432-1219 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jacob Glazer

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Thomas McGuire

affiliation not provided to SSRN

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