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Measuring adverse selection in managed health care

  • Frank, Richard G.
  • Glazer, Jacob
  • McGuire, Thomas G.

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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Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 19 (2000)
Issue (Month): 6 (November)
Pages: 829-854

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Handle: RePEc:eee:jhecon:v:19:y:2000:i:6:p:829-854
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505560

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  2. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, vol. 17(5), pages 537-555, October.
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  5. repec:mpr:mprres:1348 is not listed on IDEAS
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  16. David M. Cutler & Sarah Reber, 1996. "Paying for Health Insurance: The Tradeoff between Competition and Adverse Selection," NBER Working Papers 5796, National Bureau of Economic Research, Inc.
  17. Dranove, David & White, William D, 1994. "Recent Theory and Evidence on Competition in Hospital Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 169-209, Spring.
  18. Ken Hendricks & Michele Piccione & Guofu Tan, 1997. "Entry and Exit in Hub-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 291-303, Summer.
  19. A. P. Lerner, 1934. "The Concept of Monopoly and the Measurement of Monopoly Power," Review of Economic Studies, Oxford University Press, vol. 1(3), pages 157-175.
  20. Duan, Naihua, et al, 1984. "Choosing between the Sample-Selection Model and the Multi-part Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(3), pages 283-89, July.
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