Community Rating in Health Insurance: Trade-Off between Coverage and Selection
38 Pages Posted: 27 Nov 2015
Date Written: November 2015
We analyze the role of community rating in the optimal design of a risk adjustment scheme in competitive health insurance markets when insurers have better information on their customers' risk profiles than the sponsor of health insurance. The sponsor offers insurers a menu of risk adjustment schemes to elicit this information. The optimal scheme includes a voluntary reinsurance option. Additionally, the scheme should sometimes be complemented by a community rating requirement. The resulting inefficient coverage of low-cost types lowers the sponsor's cost of separating different insurer types. This allows the sponsor to redistribute more rents from low-cost to high-cost consumers.
Keywords: cherry picking, health insurance, mechanism design, risk adjustment
JEL Classification: D02, D47, I13
Suggested Citation: Suggested Citation