Optimal risk adjustment in a model with adverse selection and spatial competition
AbstractWe develop a model that incorporates both spatial heterogeneity and adverse selection to examine the features of optimal prices paid by an agency purchasing a bundle of services on behalf of consumers with different underlying characteristics. Service bundles are two dimensional, and to be implementable a proposed allocation must respect incentive compatibility constraints. Equilibrium provision by a duopoly is characterized, and delivery of the constrained optimal bundles is possible, as long as providers are paid risk-adjusted fees for each individual they serve. When the payment can be made on the basis of an individual's type, it should be sufficient to cover the cost of delivering the socially optimal bundle for that person, plus a mark-up over cost. If payments can be made only on the basis of a partially informative signal, the optimal type-based payments should be adjusted according to a simple linear transformation, identified by Glazer and McGuire (2000). Finally, if payments differentiated by consumer type or signal are infeasible, subsidising the cost of one of the services relative to the other can improve welfare, but in general the constrained social optimum cannot be attained. Classification-JEL Codes: D820, I110, I180
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~04-04-15.
Date of creation: 15 Apr 2004
Date of revision:
Contact details of provider:
Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Web page: http://econ.georgetown.edu/
Postal: Marcia Suss Administrative Officer Georgetown University Department of Economics Washington, DC 20057-1036
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
- I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Ching-to A. Ma, 2004. "Managed care and shadow price," Health Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 199-202.
- Biglaiser, Gary & Ma, Ching-to Albert, 2003.
" Price and Quality Competition under Adverse Selection: Market Organization and Efficiency,"
RAND Journal of Economics,
The RAND Corporation, vol. 34(2), pages 266-86, Summer.
- Gary Biglaiser & Ching-to Albert Ma, 2000. "Price and Quality Competition under Adverse Selection: Market Organization and Efficiency," Papers 0102, Boston University - Industry Studies Programme.
- 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.
- Yujing Shen & Randall P. Ellis, 1999.
"Cost-Minimizing Risk Adjustment,"
0097, Boston University - Industry Studies Programme.
- 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.
- Jack, W., 1998. "Controlling Risk Selction Incentives when Health Insurance Contracts are Endogenous," Papers 341, Australian National University - Department of Economics.
- 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.
- Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589, December.
- 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.
- Bardey, David & Canta, Chiara & Lozachmeur, Jean-Marie, 2010.
"Health Care Providers Payments Regulation when Horizontal and Vertical Differentiation Matter,"
TSE Working Papers
10-164, Toulouse School of Economics (TSE).
- Bardey, David & Canta, Chiara & Lozachmeur, Jean-Marie, 2010. "Health Care Providers Payments Regulation when Horizontal and Vertical Differentiation Matter," IDEI Working Papers 532, Institut d'Économie Industrielle (IDEI), Toulouse.
- Ronald Eduardo Gómez Suárez, 2007. "Cream-Skimming And Risk Adjustment in Colombian Health Insurance System:: The Public Insurer Case," ARCHIVOS DE ECONOMÃA 004295, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marcia Suss).
If references are entirely missing, you can add them using this form.