Working Paper: NBER ID: w20359
Authors: Michael Geruso; Thomas G. McGuire
Abstract: In many markets, including the new U.S. Exchanges, health insurance plans are paid by risk-adjusted capitation, in some markets combined with reinsurance and other payment mechanisms. This paper proposes three metrics for analyzing the insurer incentives embedded in these complex payment systems. We discuss fit, power and balance, each of which addresses a distinct market failure in health insurance. We implement these metrics in a study of Exchange payment systems with data similar to that used to develop the Exchange risk adjustment scheme and quantify the empirical tradeoffs among the metrics. We show that an essential tradeoff arises between the goals of limiting costs and limiting cream skimming because risk adjustment, which is aimed at discouraging cream-skimming, is in fact tied to costs. We find that a simple reinsurance system scores better on fit, power and balance than the risk adjustment scheme in use in the Exchanges.
Keywords: Health Plan Payment Systems; Risk Adjustment; Reinsurance; Cost Control; Adverse Selection
JEL Codes: H42; H51; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| concurrent risk adjustment (G22) | fit of payment systems (E42) |
| prospective risk adjustment (G22) | fit of payment systems (E42) |
| concurrent risk adjustment (G22) | power for cost control (L94) |
| temporary reinsurance (G22) | fit, power, and balance (C52) |
| temporary reinsurance activates for high-cost cases (G22) | high-powered incentives for majority of enrollees (G52) |
| risk adjustment mechanisms (D47) | understanding of effectiveness (C90) |
| concurrent risk adjustment (G22) | incentives to constrain spending (H61) |