Working Paper: NBER ID: w31052
Authors: Josefa Henriquez; Richard C. van Kleef; Andrew Matthews; Thomas McGuire; Francesco Paolucci
Abstract: Health plan payment systems with community-rated premiums typically include risk adjustment, risk sharing or both to compensate insurers for predictable profits (on young and healthy people) and predictable losses (on the elderly and chronically ill). This paper shows how a payment system based only on risk sharing (like in Australia), is improved by combining risk sharing with risk adjustment. Using Australia’s private health insurance market as a case study, we compare and assess the current risk sharing based payment system against alternative systems which combine risk adjustment and risk sharing. Specifically, we develop outcome measures to compare the models in terms of incentives for risk selection and incentives for cost control. We find that a payment system composed of risk adjustment based on simple risk-adjustor variables, supplemented with outlier risk sharing outperforms the current system based solely on risk sharing. Our results show that as more and better data become available, reliance on risk sharing can be reduced whilst the use of risk adjustment can be expanded. In an additional analysis, we show that changes in the payment system affect the redistribution of claims costs across different levels of coverage. We discuss qualitatively additional measures that can be taken to achieve the desired level of redistribution.
Keywords: risk adjustment; risk sharing; health insurance; Australia
JEL Codes: I11; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| payment system composed of risk adjustment based on simple risk-adjustor variables supplemented with outlier risk sharing (H55) | payment system performance (E42) |
| more and better data (Y10) | risk adjustment (G52) |
| changes in the payment system (E42) | redistribution of claims costs across different levels of coverage (G52) |