Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection

50 Pages Posted: 24 Mar 2014 Last revised: 22 Feb 2023

See all articles by Jacob Glazer

Jacob Glazer

Tel Aviv University - Faculty of Management

Thomas G. McGuire

Harvard University - Department of Health Care Policy

Julie Shi

Boston University

Date Written: March 2014

Abstract

This paper develops and implements a statistical methodology to account for the equilibrium effects (aka adverse selection) in design of risk adjustment formula in health insurance markets. Our setting is modeled on the situation in Medicare and the new state Exchanges where individuals sort themselves between a discrete set of plan types (here, two). Our "Silver" and "Gold" plans have fixed characteristics, as in the well-known research on selection and efficiency by Einav and Finkelstein (EF). We build on the EF model in several respects, including by showing that risk adjustment can be used to achieve the premiums that will lead to efficient sorting. The target risk adjustment weights can be found by use of constrained regressions, where the constraints in the estimation are conditions on premiums that should be satisfied in equilibrium. We illustrate implementation of the method with data from seven years of the Medical Expenditure Panel Survey.

Suggested Citation

Glazer, Jacob and McGuire, Thomas G. and Shi, Julie, Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection (March 2014). NBER Working Paper No. w19998, Available at SSRN: https://ssrn.com/abstract=2413346

Jacob Glazer (Contact Author)

Tel Aviv University - Faculty of Management ( email )

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

Thomas G. McGuire

Harvard University - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

Julie Shi

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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