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PubMed1992

Adverse selection: does it preclude a competitive health insurance market?

In sum, although fixed dollar subsidies have the great virtue of ferreting out cross subsidies, society may not be satisfied with the results. The scenario described by Marquis is only one of many. People seem to want lifetime insurance offering low premiums if things go bad rather than premiums that change annually as health outcomes are realized [see, e.g., Light (1992)]. But nondiversible risk may be too great for a market in life contracts to exist.

Economic Competition↗
PubMed1994

The threat of 'cream skimming' in the post-reform NHS.

The allocation of budgets to general practitioners to enable them to purchase selected hospital services has been one of the most imaginative elements of the recent National Health Service reforms in Britain. However, reliance on 'historic costs budgeting' has weakened the efficiency incentives of fund-holding, while perpetuating the large variations in resource use endemic in general practice. On the other hand, policy changes aimed to introduce elements of capitation funding, although welcome, raise the spectre of 'cream skimming'. The paper explores the potential for protection against 'cream skimming' offered by incorporating chronic health factors into the formula.

Budgets↗
PubMed1996

Decision making in quasi-markets: a pedagogic analysis.

The objective of the 1991 NHS reforms was to reduce "excessive" vertical integration by constructing a quasi-market in which incentive structures and increased availability of information would enable decision makers make better use of resources. There is, however, no overall framework in which to consider the welfare gains which result from the introduction of a quasi-market or the welfare losses which arise from distortions in a quasi-market. This paper offers an analysis which can be applied to illustrate the difficulty of estimating the welfare loss from cream skimming and also to consider the impact of local monopoly.

Budgets↗
PubMed2003

Service-level selection by HMOs in Medicare.

In the federal Medicare program, contracting health maintenance organizations (HMOs) are paid on a capitated basis. There has long been concern that an "adverse selection" of risks remain in the traditional fee-for-service (FFS) sector, since beneficiaries with low costs may leave the FFS sector and join the HMOs. The distortion associated with this form of selection is that health plans may design their mix of health care services in order to effectuate favorable selection. This paper scrutinizes patterns of HMO membership and costs by service in the FFS sector for evidence consistent with the hypothesis that HMOs engage in service-level product distortion. We develop a multi-service model of choice between FFS and HMOs and show that if the HMO sector is underproviding (overproviding) a service relative to the FFS sector, we should observe a positive (negative) correlation between the HMO market share and average costs of those remaining in the FFS sector. We estimate the correlation between the HMO market share and the average FFS costs for different health care services using Medicare data for 1996. We find evidence indicating that there exists significant service-level selection by HMOs.

Aged↗
PubMed2004

A flexible approach for estimating the effects of covariates on health expenditures.

Our estimation strategy uses sequences of conditional probability functions, similar to those used in discrete time hazard rate analyses, to construct a discrete approximation to the density function of an outcome of interest conditional on exogenous explanatory variables. Once the conditional density function has been constructed, we can examine expectations of arbitrary functions of the outcome of interest and evaluate how these expectations vary with observed exogenous covariates. We demonstrate the features and precision of the conditional density estimation method (and compare it to other commonly used methods) through Monte Carlo experiments and an application to health expenditures using the RAND Health Insurance Experiment data. Overall, we find that the approximate conditional density estimator provides accurate and precise estimates of derivatives of expected outcomes for a wide range of types of explanatory variables.

Adult↗
PubMed2004

Innovation and risk selection in deregulated social health insurance.

One important motive for deregulating social health insurance is to encourage product innovation. For the first time, the cost savings achieved by non-US managed care plans that are attributable to product innovation are estimated, using a novel approach. Panel data from a major Swiss health insurer permits to infer health status, which can be used to predict health care expenditure. The econometric evidence suggests that the managed care plans benefit from risk selection effects. In the case of the health maintenance organization (HMO) plan, however, the pure innovation effect may account for as much as two-thirds of the cost advantage.

Actuarial Analysis↗
PubMed2006

Competition among differentiated health plans under adverse selection.

Market power and adverse selection are prevalent features of the market for pre-paid health plans. However, most of the literature on adverse selection considers extreme cases: either perfect competition or monopoly. If instead health plans are horizontally differentiated, then (i) profits derived from each low risk are higher than from each high risk and (ii) when the profits derived from each high risk are negative (cross-subsidization), a health authority as informed as the health plans can implement a Pareto-improvement. Both local and global deviations from cross-subsidization are addressed within a Nash equilibrium framework.

Economic Competition↗
PubMed2000

Measuring adverse selection in managed health care.

Health plans paid by capitation have an incentive to distort the quality of services they offer to attract profitable and to deter unprofitable enrollees. We characterize plans' rationing as a "shadow price" on access to various areas of care and show how the profit maximizing shadow price depends on the dispersion in health costs, individuals' forecasts of their health costs, the correlation between use in different illness categories, and the risk adjustment system used for payment. These factors are combined in an empirically implementable index that can be used to identify the services that will be most distorted by selection incentives.

Capitation Fee↗
PubMed2001

The economics of regulatory mandates on the HMO market.

Recently proposed HMO regulations have involved mandates of two forms: (1) minimum quality standards, and (2) mandated increases in access to speciality care. I show that piecemeal regulation, which uses only one of either mandate (1) or (2), may decrease welfare for all HMO consumers. Under full regulation using both (1) and (2), if the minimum standard is set too low, say, due to political bargaining, a floor-to-ceiling effect occurs. This involves HMOs setting quality at the minimum standard, even when their quality would be above the standard in an unregulated market. Finally, I show how premiums may either increase or decrease under a mandate.

Costs and Cost Analysis↗
PubMed2001

Risk sharing as a supplement to imperfect capitation: a tradeoff between selection and efficiency.

This paper describes forms of risk sharing between insurers and the regulator in a competitive individual health insurance market with imperfectly risk-adjusted capitation payments. Risk sharing implies a reduction of an insurer's incentives for selection as well as for efficiency. In a theoretical analysis, we show how the optimal extent of risk sharing may depend on the weights the regulator assigns to these effects. Some countries employ outlier or proportional risk sharing as a supplement to demographic capitation payments. Our empirical results strongly suggest that other forms of risk sharing yield better tradeoffs between selection and efficiency.

Capitation Fee↗
PubMed2001

Regulatory restrictions on selective contracting: an empirical analysis of "any-willing-provider" regulations.

"Any-willing-provider" (AWP) laws compel managed care plans to accept any provider willing to accept the plan's terms and conditions, potentially undermining managed care's ability to constrain spending. However. AWP laws potentially respond to inefficient risk-selection by providers of managed care. With risk selection, observed reductions in expenditures in the managed care sector may be offset by increases in the fee-for-service (FFS) sector, with no net decrease. This paper uses panel data on state expenditures to compare per capita spending levels in states with and without AWP laws. The results indicate that expenditures are higher when AWP laws are enacted.

Contract Services↗
PubMed2002

Cost-minimizing risk adjustment.

Conventional risk adjustment, which sets capitation payments equal to the average cost of individuals with similar observable characteristics, is not optimal if health plans can use private information to select low-cost enrollees. "Cost-minimizing risk adjustment" minimizes the sum of capitated HMO premiums plus FFS costs by balancing the gains from HMO cost efficiency against the overpayments that result from HMO selection. Estimations using privately-insured data suggest that cost-minimizing risk adjusted premiums reduce total sponsor costs as much as 25.6% below conventional risk adjustment premiums.

Actuarial Analysis↗
PubMed2003

Enrollee mix, treatment intensity, and cost in competing indemnity and HMO plans.

Why do indemnity insurance plans cost substantially more per capita--77% more in our study--than HMOs? We answer this question using data from a large organization's insurance pool, covering 215,000 lives. We decompose cost differences for eight major medical conditions into four sources: demographics, incidence within demographic groups, treatment intensity, and prices per service. Greater incidence of disease in the indemnity plan (both from demographics themselves and within demographic groups) and higher prices each explain nearly 50% of the difference. Contrary to conventional wisdom, indemnity plans do not have greater treatment intensity.

Adult↗
PubMed2003

Self-selection and moral hazard in Chilean health insurance.

We study the existence of self-selection and moral hazard in the Chilean health insurance industry. Dependent workers must purchase health insurance either from one public or several private insurance providers. For them, we analyze the relationship between health care services utilization and the choice of either private or public insurance. In the case of independent workers, where there is no mandate, we analyze the relationship between utilization and the decision to voluntarily purchase health insurance. The results show self-selection against insurance companies for independent workers, and against public insurance for dependent workers. Moral hazard is negligible in the case of hospitalization, but for medical visits, it is quantitatively important.

Adolescent↗
PubMed1998

A model of the impact of reimbursement schemes on health plan choice.

Flat capitation (uniform prospective payments) makes enrolling healthy enrollees profitable to health plans. Plans with relatively generous benefits may attract the sick and fail through a premium spiral. We simulate a model of idealized managed competition to explore the effect on market performance of alternatives to flat capitation such as severity-adjusted capitation and reduced supply-side cost-sharing. In our model flat capitation causes severe market problems. Severity adjustment and to a lesser extent reduced supply-side cost-sharing improve market performance, but outcomes are efficient only in cases in which people bear the marginal costs of their choices.

Capitation Fee↗
PubMed1999

The impact of managed care on the existence of equilibrium in health insurance markets.

This study examines the existence of equilibrium in insurance markets when the number of insurance policy attributes is increased (i.e., managed care is introduced). Individuals choose an insurance contract from an endogenous choice set. The introduction of managed care improves the ability of low risks to distinguish themselves from high risks. This may yield equilibrium in cases when it would not exist in an FFS-only environment. However, managed care expands the product space in which a pooling policy could break a separating equilibrium. Thus, existence of equilibrium in an FFS-only environment does not imply existence with managed care.

Fee-for-Service Plans↗
PubMed2003

Belgium: risk adjustment and financial responsibility in a centralised system.

Since 1995 Belgian sickness funds are partially financed through a risk adjustment system and are held partially financially responsible for the difference between their actual and their risk-adjusted expenditures. However, they did not get the necessary instruments for exerting a real influence on expenditures and the health insurance market has not been opened for new entrants. At the same time the sickness funds have powerful tools for risk selection, because they also dominate the market for supplementary health insurance. The present risk-adjustment system is based on the results of a regression analysis with aggregate data. The main proclaimed purpose of this system is to guarantee a fair treatment to all the sickness funds. Until now the danger of risk selection has not been taken seriously. Consumer mobility has remained rather low. However, since the degree of financial responsibility is programmed to increase in the near future, the potential profits from cream skimming will increase.

Belgium↗
PubMed2003

Needs for further improvement: risk adjustment in the German health insurance system.

The German risk adjustment mechanism is used only within the public system. It was introduced in two steps, 1994 and 1995. Because of the income-related contribution, which the insured pay directly to their sickness fund, income of the insured is equalized by the mechanism and causes the biggest part of the payments among the sickness funds. On the expenditure side age, gender, disability and entitlement for sickness allowances are used as risk adjusters. The mechanism is retrospective, calculating average costs for each of the 670 risk cells defined by the risk adjusters and using these "standardized expenditures" as a base for the payment a single sickness fund gets because of its risk structure. There do still exist incentives for risk selection. The experience shows that mostly the young and healthy are willing to change sickness funds motivated by lower contribution rates. This can be used and is used for self-selection. Another cause of risk selection is regional differences. The central suggestion of an expertise on behalf of the German Ministry of Health on experiences and improvement proposals is the change to a direct modeling of morbidity.

Actuarial Analysis↗