Working Paper: NBER ID: w25374
Authors: Thomas G. McGuire; Sonja Schillo; Richard C. van Kleef
Abstract: Reinsurance can complement risk adjustment of health plan payments to improve fit of payments to plan spending at the individual and group level. This paper proposes three improvements in health plan payment systems using reinsurance. First, we base reinsurance payments on spending not accounted for by the risk adjustment system, rather than just high spending. Second, we propose pairing reinsurance for individual-level losses with repayments for individual-level profits. Third, we optimize the weights on the risk adjustors taking account of the presence of reinsurance/repayment. We implement our methodology in data from Germany, The Netherlands and the U.S. Marketplaces, comparing our modified approach to plan payment with risk adjustment as currently practiced in the three settings. The combination of the three improvements yields very substantial improvements in the individual-level fit of payments to plan spending in all three countries.
Keywords: Reinsurance; Risk Adjustment; Health Insurance; Germany; Netherlands; US Marketplaces
JEL Codes: I10; I11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Residual spending (H61) | Better alignment of payments with actual plan spending (G35) |
| Reinsurance payments based on residual spending (G52) | Reduced variation in individual-level profits and losses (D39) |
| Pairing reinsurance with repayments (G52) | Improved payment fit (J33) |
| Repayments (G51) | Limit plan gains for individuals with high predicted spending (G52) |
| Optimization of risk adjustor weights in presence of reinsurance repayments (G22) | Enhanced predictive accuracy of payment systems (C52) |
| Iterative optimization of weights (C61) | Better fit at individual level (C52) |