Optimal Ex Post Risk Adjustment in Markets with Adverse Selection
29 Pages Posted: 19 Sep 2017 Last revised: 20 Feb 2019
Date Written: February 17, 2019
This paper studies general health insurance markets. It proposes an ex post risk adjustment scheme that discourages risk selection and promotes efficient competition. Under the proposed risk adjustment scheme, the regulator engages in transfers that are conditional on the ex post profits of insurers. The risk adjustment scheme is entirely budget balanced, as it does not call for government subsidies, and requires the regulator to hold minimal information to implement it. Equilibrium is shown to exist and be efficient in any environment with a finite number of types and states even if single-crossing is not satisfied.
Keywords: health insurance, risk selection, risk adjustment, efficiency
JEL Classification: D82, D86, I10, I13, I18
Suggested Citation: Suggested Citation