Plan Sorting Under Risk Adjustment and Premium Discrimination in Health Insurance Exchanges

32 Pages Posted: 4 Apr 2013

Date Written: March 28, 2013

Abstract

In the new state-run Health Insurance Exchanges created as part of the Affordable Care Act (ACA), plans with different benefit coverage of health care costs are provided in order to expand consumer choices and increase consumer welfare. According to the ACA, premiums can differ based on enrollees’ characteristics and are risk-adjusted before returning to insurance plans in these markets. This paper analyzes how risk adjustment and premium discrimination affect consumers’ choices of plans theoretically and empirically. I develop a model to show that both risk adjustment and premium discrimination encourage consumers to enroll in plans with high benefit coverage under plausible assumptions. I simulate the equilibrium sorting using data for the Exchange-eligible population drawn from the Medical Expenditure Panel Survey. I also simulate the consumers’ plan choices under different scenarios of risk adjustment, and calculate the corresponding welfare effect.

Keywords: Health Insurance Exchanges, Plan Sorting, Risk Adjustment

JEL Classification: I11, I18, L11

Suggested Citation

Shi, Julie, Plan Sorting Under Risk Adjustment and Premium Discrimination in Health Insurance Exchanges (March 28, 2013). Available at SSRN: https://ssrn.com/abstract=2244691 or http://dx.doi.org/10.2139/ssrn.2244691

Julie Shi (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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