Health plans paid by capitation have an incentive to distort the quality of services they offer to attract profitable and to deter unprofitable enrollees. We characterize plans' rationing as imposing a show that the profit maximizing shadow price depends on the dispersion in health costs, how well individuals forecast their health costs, the correlation between use in different illness categories, and the risk adjustment system used for payment. We further show how these factors can be combined in an empirically implementable index that can be used to identify the services that will be most distorted in competition among managed care plans. A simple welfare measure is developed to quantify the distortion caused by selection incentives. We illustrate the application of our ideas with a Medicaid data set, and conduct policy analyses of risk adjustment and other options for dealing with adverse selection.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6825.
Length: Date of creation: Dec 1998 Date of revision: Handle: RePEc:nbr:nberwo:6825
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References listed on IDEAS 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.:
David M. Cutler & Richard J. Zeckhauser, 1998.
"Adverse Selection in Health Insurance,"
NBER Chapters,
in: Frontiers in Health Policy Research, volume 1, pages 1-32
National Bureau of Economic Research, Inc.
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