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Deriving risk adjustment payment weights to maximize efficiency of health insurance markets

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  • Layton, Timothy J.
  • McGuire, Thomas G.
  • van Kleef, Richard C.

Abstract

Risk-adjustment is critical to the functioning of regulated health insurance markets. To date, estimation and evaluation of a risk-adjustment model has been based on statistical rather than economic objective functions. We develop a framework where the objective of risk-adjustment is to minimize the efficiency loss from service-level distortions due to adverse selection, and we use the framework to develop a welfare-grounded method for estimating risk-adjustment weights. We show that when the number of risk adjustor variables exceeds the number of decisions plans make about service allocations, incentives for service-level distortion can always be eliminated via a constrained least-squares regression. When the number of plan service-level allocation decisions exceeds the number of risk-adjusters, the optimal weights can be found by an OLS regression on a straightforward transformation of the data. We illustrate this method with the data used to estimate risk-adjustment payment weights in the Netherlands (N = 16.5 million).

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  • Layton, Timothy J. & McGuire, Thomas G. & van Kleef, Richard C., 2018. "Deriving risk adjustment payment weights to maximize efficiency of health insurance markets," Journal of Health Economics, Elsevier, vol. 61(C), pages 93-110.
    • Handle: RePEc:eee:jhecon:v:61:y:2018:i:c:p:93-110
    DOI: 10.1016/j.jhealeco.2018.07.001
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    Cited by:

    1. Joseph P. Newhouse & Mary Beth Landrum & Mary Price & J. Michael McWilliams & John Hsu & Thomas G. McGuire, 2019. "The Comparative Advantage of Medicare Advantage," American Journal of Health Economics, University of Chicago Press, vol. 5(2), pages 281-301, Spring.
    2. Pilny, Adam & Wübker, Ansgar & Ziebarth, Nicolas R., 2017. "Introducing risk adjustment and free health plan choice in employer-based health insurance: Evidence from Germany," Journal of Health Economics, Elsevier, vol. 56(C), pages 330-351.
    3. 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.
    4. Carey, Colleen, 2021. "Sharing the burden of subsidization: Evidence on pass-through from a subsidy revision in Medicare Part D," Journal of Public Economics, Elsevier, vol. 198(C).
    5. Richard C. van Kleef & René C. J. A. van Vliet, 2022. "How to deal with persistently low/high spenders in health plan payment systems?," Health Economics, John Wiley & Sons, Ltd., vol. 31(5), pages 784-805, May.
    6. Thomas G. McGuire & Sonja Schillo & Richard C. van Kleef, 2018. "Reinsurance, Repayments, and Risk Adjustment in Individual Health Insurance: Germany, The Netherlands and the U.S. Marketplaces," NBER Working Papers 25374, National Bureau of Economic Research, Inc.
    7. Michael Geruso & Timothy J. Layton, 2017. "Selection in Health Insurance Markets and Its Policy Remedies," Journal of Economic Perspectives, American Economic Association, vol. 31(4), pages 23-50, Fall.
    8. Bergquist, Savannah L. & Layton, Timothy J. & McGuire, Thomas G. & Rose, Sherri, 2019. "Data transformations to improve the performance of health plan payment methods," Journal of Health Economics, Elsevier, vol. 66(C), pages 195-207.
    9. Kulshreshtha, Shobhit & Salm, Martin & Wübker, Ansgar, 2022. "Does Population Sorting through Internal Migration Increase Healthcare Costs and Needs in Peripheral Regions?," IZA Discussion Papers 15559, Institute of Labor Economics (IZA).
    10. Thomas G. McGuire & Sonja Schillo & Richard C. Kleef, 2021. "Very high and low residual spenders in private health insurance markets: Germany, The Netherlands and the U.S. Marketplaces," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 22(1), pages 35-50, February.
    11. Sherri Rose & Thomas G. McGuire, 2019. "Limitations of P-Values and R-squared for Stepwise Regression Building: A Fairness Demonstration in Health Policy Risk Adjustment," The American Statistician, Taylor & Francis Journals, vol. 73(S1), pages 152-156, March.
    12. Kulshreshtha, Shobhit & Salm, Martin & Wübker, Ansgar, 2022. "Does population sorting through internal migration increase healthcare costs and needs in peripheral regions?," Ruhr Economic Papers 970, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    13. Savannah L. Bergquist & Timothy J. Layton & Thomas G. McGuire & Sherri Rose, 2018. "Intervening on the Data to Improve the Performance of Health Plan Payment Methods," NBER Working Papers 24491, National Bureau of Economic Research, Inc.
    14. Sherri Rose & Thomas G. McGuire, 2018. "Limitations of P-Values and $R^2$ for Stepwise Regression Building: A Fairness Demonstration in Health Policy Risk Adjustment," Papers 1803.05513, arXiv.org, revised Aug 2018.
    15. Michel Oskam & Richard C. van Kleef & René C. J. A. van Vliet, 2023. "Improving diagnosis-based cost groups in the Dutch risk equalization model: the effects of a new clustering method and allowing for multimorbidity," International Journal of Health Economics and Management, Springer, vol. 23(2), pages 303-324, June.
    16. Ayman Fouda & Gianluca Fiorentini & Francesco Paolucci, 2017. "Competitive Health Markets and Risk Equalisation in Australia: Lessons Learnt from Other Countries," Applied Health Economics and Health Policy, Springer, vol. 15(6), pages 745-754, December.
    17. Constantinou, Panayotis & Tuppin, Philippe & Gastaldi-Ménager, Christelle & Pelletier-Fleury, Nathalie, 2022. "Defining a risk-adjustment formula for the introduction of population-based payments for primary care in France," Health Policy, Elsevier, vol. 126(9), pages 915-924.
    18. Laura Anselmi & Yiu-Shing Lau & Matt Sutton & Anna Everton & Rob Shaw & Stephen Lorrimer, 2022. "Use of past care markers in risk-adjustment: accounting for systematic differences across providers," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(1), pages 133-151, February.

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    More about this item

    Keywords

    Health insurance; Risk adjustment; Adverse selection;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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