Tradeoffs in the Design of Health Plan Payment Systems: Fit, Power and Balance

42 Pages Posted: 22 Feb 2015  

Michael Geruso

University of Texas at Austin; National Bureau of Economic Research (NBER)

Thomas G. McGuire

Harvard University - Department of Health Care Policy

Multiple version iconThere are 2 versions of this paper

Date Written: February 12, 2015

Abstract

In many markets, including the new U.S. Exchanges, health insurance plans are paid by risk-adjusted capitation, in some markets combined with reinsurance and other payment mechanisms. This paper proposes three metrics for analyzing the insurer incentives embedded in these complex payment systems. We discuss fit, power and balance, each of which addresses a distinct market failure in health insurance. We implement these metrics in a study of Exchange payment systems with data similar to that used to develop the Exchange risk adjustment scheme and quantify the empirical tradeoffs among the metrics. We show that an essential tradeoff arises between the goals of limiting costs and limiting cream skimming because risk adjustment, which is aimed at discouraging cream-skimming, is in fact tied to costs. We find that a simple reinsurance system scores better on fit, power and balance than the risk adjustment scheme in use in the Exchanges.

Keywords: health insurance, risk adjustment, capitation, reinsurance

Suggested Citation

Geruso, Michael and McGuire, Thomas G., Tradeoffs in the Design of Health Plan Payment Systems: Fit, Power and Balance (February 12, 2015). Available at SSRN: https://ssrn.com/abstract=2567957 or http://dx.doi.org/10.2139/ssrn.2567957

Michael Geruso (Contact Author)

University of Texas at Austin ( email )

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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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