Working Paper: CEPR ID: DP10943
Authors: Michiel Bijlsma; Jan Boone; Gijsbert Zwart
Abstract: 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 Codes: D02; D47; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Community Rating (CR) (R50) | Risk Adjustment in Health Insurance Markets (G52) |
| Community Rating (CR) (R50) | Higher Welfare (I39) |
| Risk Adjustment (RA) (G22) | Redistribution of Resources from Low-Cost to High-Cost Consumers (H23) |
| Community Rating (CR) (R50) | Less Generous Coverage for Low-Risk Types (G52) |
| Optimal Risk Adjustment Scheme (G22) | Efficient Allocation of Resources (D61) |
| Ex Post Risk Adjustment (G52) | Screening Insurers Based on Privately Observable Costs (G52) |
| Community Rating (CR) (R50) | Dominates Risk Rating (RR) under Certain Conditions (D81) |