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Competition leverage: how the demand side affects optimal risk adjustment

Listed author(s):
  • Michiel Bijlsma
  • Jan Boone
  • Gijsbert Zwart

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.

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File URL: http://hdl.handle.net/10.1111/1756-2171.12071
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Article provided by RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 45 (2014)
Issue (Month): 4 (December)
Pages: 792-815

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Handle: RePEc:bla:randje:v:45:y:2014:i:4:p:792-815
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