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Gold and Silver health plans: Accommodating demand heterogeneity in managed competition

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  • Glazer, Jacob
  • McGuire, Thomas G.
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    Abstract

    New regulation of health insurance markets creates multiple levels of health plans, with designations like “Gold” and “Silver.” The underlying rationale for the heavy-metal approach to insurance regulation is that heterogeneity in demand for health care is not only due to health status (sick demand more than the healthy) but also to other, “taste” related factors (rich demand more than the poor). This paper models managed competition with demand heterogeneity to consider plan payment and enrollee premium policies in relation to efficiency (net consumer benefit) and fairness (the European concept of “solidarity”). Specifically, this paper studies how to implement a “Silver” and “Gold” health plan efficiently and fairly in a managed competition context. We show that there are sharp tradeoffs between efficiency and fairness. When health plans cannot or may not (because of regulation) base premiums on any factors affecting demand, enrollees do not choose the efficient plan. When taste (e.g., income) can be used as a basis of payment, a simple tax can achieve both efficiency and fairness. When only health status (and not taste) can be used as a basis of payment, health status-based taxes and subsidies are required and efficiency can only be achieved with a modified version of fairness we refer to as “weak solidarity.” An overriding conclusion is that the regulation of premiums for both the basic and the higher level plans is necessary for efficiency.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Health Economics.

    Volume (Year): 30 (2011)
    Issue (Month): 5 ()
    Pages: 1011-1019

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    Handle: RePEc:eee:jhecon:v:30:y:2011:i:5:p:1011-1019

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    Web page: http://www.elsevier.com/locate/inca/505560

    Related research

    Keywords: Health economics; Managed competition; Health insurance;

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    References

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    1. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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    8. Smart, Michael, 2000. "Competitive Insurance Markets with Two Unobservables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 153-69, February.
    9. Frank, Richard G. & Glazer, Jacob & McGuire, Thomas G., 2000. "Measuring adverse selection in managed health care," Journal of Health Economics, Elsevier, vol. 19(6), pages 829-854, November.
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    11. Sen, Amartya, 2009. "Capitalism Beyond the Crisis," Scholarly Articles 2961699, Harvard University Department of Economics.
    12. William E. Encinosa & David E. M. Sappington, 1997. "Competition among Health Maintenance Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 129-150, 03.
    13. Olivella, Pau & Vera-Hernandez, Marcos, 2007. "Competition among differentiated health plans under adverse selection," Journal of Health Economics, Elsevier, vol. 26(2), pages 233-250, March.
    14. Encinosa, William, 2001. "The economics of regulatory mandates on the HMO market," Journal of Health Economics, Elsevier, vol. 20(1), pages 85-107, January.
    15. Van de ven, Wynand P.M.M. & Ellis, Randall P., 2000. "Risk adjustment in competitive health plan markets," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 14, pages 755-845 Elsevier.
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    Cited by:
    1. Jacob Glazer & Thomas McGuire & Julie Shi, 2014. "Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection," NBER Working Papers 19998, National Bureau of Economic Research, Inc.
    2. Jacob Glazer & Thomas G. McGuire & Julie Shi, 2013. "Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection," NBER Chapters, in: Measuring and Modeling Health Care Costs National Bureau of Economic Research, Inc.
    3. Glazer, Jacob & McGuire, Thomas G., 2013. "Making Medicare advantage a middle-class program," Journal of Health Economics, Elsevier, vol. 32(2), pages 463-473.

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