A Note on Risk-Sharing Mechanisms for the Colombian Health Insurance System

Abstract

We evaluate, in terms of efficiency and selection incentives, four different ex post risk sharing mechanisms. Outlier risk sharing (ORS), proportional risk sharing (PRS), risk sharing for high costs (RSHC) and risk sharing for high risks. Our results suggest that the best mechanism in terms of their implied efficiency selection trade off are, risk sharing for high costs and risk sharing for high risks. In general, outlier risk sharing has a poor performance. Our results are robust with respect to different scenarios for ex ante risk adjustment or incentives for efficiency and selection based on expected or realized costs. We believe that the most realistic scenario analysed is one in which insurance companies use expected reimbursements and costs as their best source of information (signal) to decide on efficiency and selection trade-offs. In this case, we found that risk sharing of high risks dominates all other mechanisms.

Keywords: Risk Adjustment, Risk Selection, Efficiency

JEL Classification: I11, I13, I18, C45, C55