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Tradeoffs in the design of health plan payment systems: Fit, power and balance

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  • Geruso, Michael
  • McGuire, Thomas G.

Abstract

In many markets, including the new U.S. Marketplaces, health insurance plans are paid by risk-adjusted capitation, sometimes combined with reinsurance and other payment mechanisms. This paper proposes a framework for evaluating the de facto insurer incentives embedded in these complex payment systems. We discuss fit, power and balance, each of which addresses a distinct market failure in health insurance. We implement empirical metrics of fit, power, and balance in a study of Marketplace payment systems. Using data similar to that used to develop the Marketplace risk adjustment scheme, we quantify tradeoffs among the three classes of incentives. We show that an essential tradeoff arises between the goals of limiting costs and limiting cream skimming because risk adjustment, which is aimed at discouraging cream-skimming, weakens cost control incentives in practice. A simple reinsurance system scores better on our measures of fit, power and balance than the risk adjustment scheme in use in the Marketplaces.

Suggested Citation

  • Geruso, Michael & McGuire, Thomas G., 2016. "Tradeoffs in the design of health plan payment systems: Fit, power and balance," Journal of Health Economics, Elsevier, vol. 47(C), pages 1-19.
  • Handle: RePEc:eee:jhecon:v:47:y:2016:i:c:p:1-19
    DOI: 10.1016/j.jhealeco.2016.01.007
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    References listed on IDEAS

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    Cited by:

    1. Joseph P. Newhouse & Mary Beth Landrum & Mary Price & J. Michael McWilliams & John Hsu & Thomas McGuire, 2018. "The Comparative Advantage of Medicare Advantage," NBER Working Papers 24289, National Bureau of Economic Research, Inc.
    2. repec:eee:pubeco:v:155:y:2017:i:c:p:21-37 is not listed on IDEAS
    3. Pilny, Adam & Wübker, Ansgar & Ziebarth, Nicolas R., 2017. "Introducing risk adjustment and free health plan choice in employer-based health insurance: Evidence from Germany," Journal of Health Economics, Elsevier, vol. 56(C), pages 330-351.
    4. Schmid, Christian P.R. & Beck, Konstantin, 2016. "Re-insurance in the Swiss health insurance market: Fit, power, and balance," Health Policy, Elsevier, vol. 120(7), pages 848-855.
    5. Michael Geruso & Timothy Layton, 2015. "Upcoding: Evidence from Medicare on Squishy Risk Adjustment," NBER Working Papers 21222, National Bureau of Economic Research, Inc.
    6. repec:tpr:restat:v:101:y:2019:i:2:p:326-340 is not listed on IDEAS
    7. Timothy J. Layton & Thomas G. McGuire & Anna D. Sinaiko, 2016. "Risk Corridors and Reinsurance in Health Insurance Marketplaces: Insurance for Insurers," American Journal of Health Economics, MIT Press, vol. 2(1), pages 66-95, January.
    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. Handel, Benjamin R. & Kolstad, Jonathan T. & Spinnewijn, Johannes, 2015. "Information frictions and adverse selection: policyinterventions in health insurance markets," LSE Research Online Documents on Economics 65011, London School of Economics and Political Science, LSE Library.
    10. Benjamin R. Handel & Jonathan T. Kolstad & Johannes Spinnewijn, 2015. "Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets," NBER Working Papers 21759, National Bureau of Economic Research, Inc.
    11. Timothy J. Layton & Randall P. Ellis & Thomas G. McGuire, 2015. "Assessing Incentives for Adverse Selection in Health Plan Payment Systems," Boston University - Department of Economics - Working Papers Series wp2015-024, Boston University - Department of Economics.
    12. Michael Geruso & Timothy J. Layton, 2017. "Selection in Health Insurance Markets and Its Policy Remedies," Journal of Economic Perspectives, American Economic Association, vol. 31(4), pages 23-50, Fall.
    13. Keith M. Marzilli Ericson & Kimberley H. Geissler & Benjamin Lubin, 2018. "The Impact of Partial-Year Enrollment on the Accuracy of Risk-Adjustment Systems: A Framework and Evidence," American Journal of Health Economics, MIT Press, vol. 4(4), pages 454-478, Fall.
    14. Jason Abaluck & Jonathan Gruber, 2016. "Improving the Quality of Choices in Health Insurance Markets," NBER Working Papers 22917, National Bureau of Economic Research, Inc.
    15. repec:aea:aejpol:v:11:y:2019:i:2:p:64-107 is not listed on IDEAS
    16. Handel, Benjamin R. & Kolstad, Jonathan & Spinnewijn, Johannes, 2015. "Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets," CEPR Discussion Papers 10953, C.E.P.R. Discussion Papers.
    17. Michael Geruso & Timothy Layton & Daniel Prinz, 2019. "Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges," American Economic Journal: Economic Policy, American Economic Association, vol. 11(2), pages 64-107, May.
    18. repec:eee:jhecon:v:60:y:2018:i:c:p:16-29 is not listed on IDEAS
    19. Schillo, Sonja & Lux, Gerald & Wasem, Juergen & Buchner, Florian, 2016. "High cost pool or high cost groups—How to handle high(est) cost cases in a risk adjustment mechanism?," Health Policy, Elsevier, vol. 120(2), pages 141-147.
    20. Handel, Benjamin R. & Kolstad, Jonathan T. & Spinnewijn, Johannes, 2018. "Information frictions and adverse selection: policy interventions in health insurance markets," LSE Research Online Documents on Economics 87775, London School of Economics and Political Science, LSE Library.
    21. Benjamin R. Handel & Jonathan T. Kolstad & Johannes Spinnewijn, 2015. "Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets," CESifo Working Paper Series 5623, CESifo Group Munich.
    22. repec:pal:gpprii:v:44:y:2019:i:3:d:10.1057_s41288-018-00115-5 is not listed on IDEAS
    23. Timothy J. Layton & Thomas G. McGuire, 2017. "Marketplace Plan Payment Options for Dealing with High-Cost Enrollees," American Journal of Health Economics, MIT Press, vol. 3(2), pages 165-191, Spring.
    24. repec:tpr:amjhec:v:2:y:2016:i:1:p:66-95 is not listed on IDEAS
    25. Benjamin R. Handel & Jonathan T. Kolstad & Johannes Spinnewijn, 2015. "Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets," CEP Discussion Papers dp1390, Centre for Economic Performance, LSE.

    More about this item

    Keywords

    Health insurance; Risk adjustment; Reinsurance; Capitation; Adverse selection;

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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