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Demand elasticities and service selection incentives among competing private health plans

Author

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  • Ellis, Randall P.
  • Martins, Bruno
  • Zhu, Wenjia

Abstract

We examine selection incentives by health plans while refining the selection index of McGuire et al. (2014) to reflect not only service predictability and predictiveness but also variation in cost sharing, risk-adjusted profits, profit margins, and newly-refined demand elasticities across 26 disaggregated types of service. We contrast selection incentives, measured by service selection elasticities, across six plan types using privately-insured claims data from 73 large employers from 2008 to 2014. Compared to flat capitation, concurrent risk adjustment reduces the elasticity by 47%, prospective risk adjustment by 43%, simple reinsurance system by 32%, and combined concurrent risk adjustment with reinsurance by 60%. Reinsurance significantly reduces the variability of individual-level profits, but increases the correlation of expected spending with profits, which strengthens selection incentives.

Suggested Citation

  • Ellis, Randall P. & Martins, Bruno & Zhu, Wenjia, 2017. "Demand elasticities and service selection incentives among competing private health plans," Journal of Health Economics, Elsevier, vol. 56(C), pages 352-367.
    • Handle: RePEc:eee:jhecon:v:56:y:2017:i:c:p:352-367
    DOI: 10.1016/j.jhealeco.2017.09.006
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    Citations

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    Cited by:

    1. A. A. Withagen-Koster & R. C. Kleef & F. Eijkenaar, 2020. "Incorporating self-reported health measures in risk equalization through constrained regression," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 21(4), pages 513-528, June.
    2. Alexandre Vimont & Henri Leleu & Isabelle Durand-Zaleski, 2022. "Machine learning versus regression modelling in predicting individual healthcare costs from a representative sample of the nationwide claims database in France," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(2), pages 211-223, March.
    3. Withagen-Koster, Anja A. & van Kleef, Richard C. & Eijkenaar, Frank, 2023. "Predictable profits and losses in a health insurance market with risk equalization: A multiple-contract period perspective," Health Policy, Elsevier, vol. 131(C).
    4. Shuli Brammli-Greenberg & Jacob Glazer & Ruth Waitzberg, 2019. "Modest risk-sharing significantly reduces health plans’ incentives for service distortion," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 20(9), pages 1359-1374, December.

    More about this item

    Keywords

    Health insurance; Risk selection; Risk adjustment; Reinsurance; Health care demand elasticities;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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