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Optimal cost reimbursement of health insurers to reduce risk selection

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  • Mathias Kifmann
  • Normann Lorenz

Abstract

In the absence of a perfect risk adjustment scheme, reimbursing health insurers' costs can reduce risk selection in community-rated health insurance markets. In this paper, we develop a model in which insurers determine the cost efficiency of health care and have incentives for risk selection. We derive the optimal cost reimbursement function, which balances the incentives for cost efficiency and risk selection. For health cost data from a Swiss health insurer, we find that an optimal cost reimbursement scheme should reimburse costs only up to a threshold. Copyright (C) 2010 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.1614
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 20 (2011)
Issue (Month): 5 (May)
Pages: 532-552

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Handle: RePEc:wly:hlthec:v:20:y:2011:i:5:p:532-552

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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Keywords: health insurance ; risk selection ; cost reimbursement ; risk adjustment ;

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  1. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
  2. van Barneveld, Erik M. & Lamers, Leida M. & van Vliet, René C. J. A. & van de Ven, Wynand P. M. M., 1998. "Mandatory pooling as a supplement to risk-adjusted capitation payments in a competitive health insurance market," Social Science & Medicine, Elsevier, vol. 47(2), pages 223-232, July.
  3. 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.
  4. Thomas G. McGuire & Jacob Glazer, 2000. "Optimal Risk Adjustment in Markets with Adverse Selection: An Application to Managed Care," American Economic Review, American Economic Association, vol. 90(4), pages 1055-1071, September.
  5. Glazer, Jacob & McGuire, Thomas G., 2002. "Setting health plan premiums to ensure efficient quality in health care: minimum variance optimal risk adjustment," Journal of Public Economics, Elsevier, vol. 84(2), pages 153-173, May.
  6. Barros, Pedro Pita, 2003. "Cream-skimming, incentives for efficiency and payment system," Journal of Health Economics, Elsevier, vol. 22(3), pages 419-443, May.
  7. Marchand, Maurice & Sato, Motohiro & Schokkaert, Erik, 2003. " Prior Health Expenditures and Risk Sharing with Insurers Competing on Quality," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 647-69, Winter.
  8. van Barneveld, Erik M. & Lamers, Leida M. & van Vliet, Rene C. J. A. & van de Ven, Wynand P. M. M., 2001. "Risk sharing as a supplement to imperfect capitation: a tradeoff between selection and efficiency," Journal of Health Economics, Elsevier, vol. 20(2), pages 147-168, March.
  9. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
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