Working Paper: NBER ID: w20021
Authors: Joseph P. Newhouse; Mary Price; J. Michael McWilliams; John Hsu; Thomas G. McGuire
Abstract: There are two types of selection models in the health economics literature. One focuses on choice between a fixed set of contracts. Consumers with greater demand for medical care services prefer contracts with more generous reimbursement, resulting in a suboptimal proportion of consumers in such contracts in equilibrium. In extreme cases more generous contracts may disappear (the "death spiral"). In the other model insurers tailor the contracts they offer consumers to attract profitable consumers. An equilibrium may or may not exist in such models, but if it exists it is not first best. \n\nThe Medicare Advantage program offers an opportunity to study these models empirically, although unlike the models in the economics literature there is a regulator with various tools to address selection. One such tool is risk adjustment, or making budget neutral transfers among insurers using observable characteristics of enrollees that predict spending. Medicare drastically changed its risk adjustment program starting in 2004 and made a number of other changes to reduce selection as well. Previous work has argued that the changes worsened selection. We show, using a much larger data set, that this was not the case, but that some inherent selection may remain.
Keywords: Medicare Advantage; favorable selection; risk adjustment; health economics
JEL Codes: I11; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of the HCC risk adjustment system (I13) | reduced favorable selection in Medicare Advantage (I18) |
| implementation of a lock-in period for beneficiaries (H55) | reduced favorable selection in Medicare Advantage (I18) |
| risk adjustment tools and the lock-in period for beneficiaries (I13) | mitigate selection (C52) |
| favorable selection (C52) | balanced risk profile between MA and TM (C58) |
| residual selection (C52) | beneficiaries with complex health needs (I11) |