How Much Favorable Selection is Left in Medicare Advantage?

38 Pages Posted: 7 Apr 2014 Last revised: 16 Sep 2021

See all articles by Joseph P. Newhouse

Joseph P. Newhouse

Harvard Medical School; Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Mary Price

Kaiser Permanente Division of Research

Michael McWilliams

Harvard University

John Hsu

Partners HealthCare

Thomas G. McGuire

Harvard University - Department of Health Care Policy

Date Written: March 2014

Abstract

There are two types of selection models in the health economics literature. One focuses on choice between a fixed set of contracts. Consumers with greater demand for medical care services prefer contracts with more generous reimbursement, resulting in a suboptimal proportion of consumers in such contracts in equilibrium. In extreme cases more generous contracts may disappear (the "death spiral"). In the other model insurers tailor the contracts they offer consumers to attract profitable consumers. An equilibrium may or may not exist in such models, but if it exists it is not first best. The Medicare Advantage program offers an opportunity to study these models empirically, although unlike the models in the economics literature there is a regulator with various tools to address selection. One such tool is risk adjustment, or making budget neutral transfers among insurers using observable characteristics of enrollees that predict spending. Medicare drastically changed its risk adjustment program starting in 2004 and made a number of other changes to reduce selection as well. Previous work has argued that the changes worsened selection. We show, using a much larger data set, that this was not the case, but that some inherent selection may remain.

Suggested Citation

Newhouse, Joseph P. and Price, Mary and McWilliams, Michael and Hsu, John and McGuire, Thomas G., How Much Favorable Selection is Left in Medicare Advantage? (March 2014). Available at SSRN: https://ssrn.com/abstract=2421081

Joseph P. Newhouse (Contact Author)

Harvard Medical School; Harvard Kennedy School (HKS) ( email )

Department of Health Care Policy
Boston, MA 02115
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Mary Price

Kaiser Permanente Division of Research ( email )

CA
United States

Michael McWilliams

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

John Hsu

Partners HealthCare ( email )

115 Fourth Ave.
Boston, MA 02114
United States

Thomas G. McGuire

Harvard University - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

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