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Competition leverage: how the demand side affects optimal risk adjustment

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  • Michiel Bijlsma
  • Jan Boone
  • Gijsbert Zwart

Abstract

type="main"> We study optimal risk adjustment in imperfectly competitive health insurance markets when high-risk consumers are less likely to switch insurer than low-risk consumers. Insurers then have an incentive to select even if risk adjustment perfectly corrects for cost differences. To achieve first best, risk adjustment should overcompensate insurers for serving high-risk agents. Second, we identify a trade-off between efficiency and consumer welfare. Reducing the difference in risk adjustment subsidies increases consumer welfare by leveraging competition from the elastic low-risk market to the less elastic high-risk market. Third, mandatory pooling can increase consumer surplus further, at the cost of efficiency.

Suggested Citation

  • Michiel Bijlsma & Jan Boone & Gijsbert Zwart, 2014. "Competition leverage: how the demand side affects optimal risk adjustment," RAND Journal of Economics, RAND Corporation, vol. 45(4), pages 792-815, December.
  • Handle: RePEc:bla:randje:v:45:y:2014:i:4:p:792-815
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    File URL: http://hdl.handle.net/10.1111/1756-2171.12071
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    Citations

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    Cited by:

    1. Normann Lorenz, 2013. "Adverse selection and risk adjustment under imperfect competition," Research Papers in Economics 2013-05, University of Trier, Department of Economics.
    2. repec:eee:pubeco:v:155:y:2017:i:c:p:21-37 is not listed on IDEAS
    3. Normann Lorenz, 2014. "Using quantile regression for optimal risk adjustment," Research Papers in Economics 2014-11, University of Trier, Department of Economics.
    4. Bijlsma, M. & Boone, Jan & Zwart, G.T.J., 2015. "Community Rating in Health Insurance : Trade-Off Between Coverage and Selection," Discussion Paper 2015-022, Tilburg University, Tilburg Law and Economic Center.
    5. Boone, Jan, 2015. "Basic versus supplementary health insurance: Moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 128(C), pages 50-58.
    6. R. C. Kleef & R. C. J. A. Vliet & W. P. M. M. Ven, 2016. "Overpaying morbidity adjusters in risk equalization models," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(7), pages 885-895, September.
    7. Normann Lorenz, 2014. "The interaction of direct and indirect risk selection," Research Papers in Economics 2014-12, University of Trier, Department of Economics.
    8. Colleen Carey, 2017. "Technological Change and Risk Adjustment: Benefit Design Incentives in Medicare Part D," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 38-73, February.
    9. Lorenz, Normann, 2015. "The interaction of direct and indirect risk selection," Journal of Health Economics, Elsevier, vol. 42(C), pages 81-89.
    10. Normann Lorenz, 2014. "Adverse selection and heterogeneity of demand responsiveness," Research Papers in Economics 2014-02, University of Trier, Department of Economics.

    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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