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Why Are Managed Care Plans Less Expensive: Risk Selection, Utilization, or Reimbursement?

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  • Daniel Polsky
  • Sean Nicholson

Abstract

This article develops a new method of decomposing the cost difference between HMO and non-HMO plans into observed risk selection, unobserved risk selection, utilization differences, and differences in provider reimbursement rates. We implement this method using a large national sample of employer-sponsored health insurance enrollees from the Community Tracking Study Household Survey. We find no evidence that HMO plans attract a disproportionate share of low-risk enrollees; the US$188 difference between HMO and non-HMO medical expenditures per enrollee can be explained by the relatively low provider reimbursement rates paid by HMO plans. This indicates there may be little need for employers to risk adjust insurance premiums or otherwise restrict employee choice of plan types. Copyright The Journal of Risk and Insurance.

Suggested Citation

  • Daniel Polsky & Sean Nicholson, 2004. "Why Are Managed Care Plans Less Expensive: Risk Selection, Utilization, or Reimbursement?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(1), pages 21-40.
  • Handle: RePEc:bla:jrinsu:v:71:y:2004:i:1:p:21-40
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.0022-4367.2004.00077.x
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    Cited by:

    1. Mario Jametti & Thomas von Ungern-Sternberg, 2006. "Risk Selection in Natural Disaster Insurance – the Case of France," CESifo Working Paper Series 1683, CESifo Group Munich.
    2. Sean Nicholson & Kate Bundorf & Rebecca M. Stein & Daniel Polsky, 2003. "The Magnitude and Nature of Risk Selection in Employer-Sponsored Health Plans," NBER Working Papers 9937, National Bureau of Economic Research, Inc.
    3. Michael Anderson & Carlos Dobkin & Tal Gross, 2012. "The Effect of Health Insurance Coverage on the Use of Medical Services," American Economic Journal: Economic Policy, American Economic Association, vol. 4(1), pages 1-27, February.
    4. Mario Jametti & Thomas von Ungern-Sternberg, 2010. "Risk Selection in Natural-Disaster Insurance," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(2), pages 344-364, June.
    5. Kaestner, Robert & Guardado, Jose, 2008. "Medicare reimbursement, nurse staffing, and patient outcomes," Journal of Health Economics, Elsevier, vol. 27(2), pages 339-361, March.
    6. Dominic Coey, 2013. "Physician Incentives and Treatment Choices in Heart Attack Management," Discussion Papers 12-027, Stanford Institute for Economic Policy Research.
    7. Chunling Lu & Richard G. Frank & Thomas G. Mcguire, 2009. "Demand Response To Cost Sharing Under Managed Health Care," Contemporary Economic Policy, Western Economic Association International, vol. 27(1), pages 1-15, January.
    8. Jason Shafrin, 2010. "Operating on commission: analyzing how physician financial incentives affect surgery rates," Health Economics, John Wiley & Sons, Ltd., vol. 19(5), pages 562-580.

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