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Simulation of a Health Insurance Market with Adverse Selection

Author

Listed:
  • Roger D. Feldman

    (University of Minnesota, Minneapolis, Minnesota)

  • Bryan E. Dowd

    (University of Minnesota, Minneapolis, Minnesota)

Abstract

A health insurance market is examined in which individuals with a history of high utilization of health care services tend to select fee-for-service (FFS) insurance when offered a choice between FFS and health maintenance organizations (HMOs). In addition, HMOs are assumed to practice community rating of employee groups. Based on these observations and health plan enrollment and premium data from Minneapolis-St. Paul, a deterministic simulation model is constructed to predict equilibrium market shares and premiums for HMO and FFS insurers within a firm. Despite the fact that favorable selection enhances their ability to compete with FFS insurers, the model predicts that HMOs maximize profits at less than 100% market share, and at a lower share than they could conceivably capture. That is, HMOs would not find it to their advantage to drive FFS insurers from the market even if they could. In all cases, however, the profit-maximizing HMO premium is greater than the experience-rated premium and, thus, the average health insurance premium per employee in firms offering both HMOs and FFS insurance is predicted to be greater than in firms offering one experience-rated plan. The model may be used to simulate the effects of varying the employer's method of contributing to health insurance premiums. Several contribution methods are compared. Employers who offer FFS and HMO insurance and pay the full cost of the lowest-cost plan are predicted to have lower average total premiums (employer plus employee contributions) than employers who pay any level percent of the cost of each plan.

Suggested Citation

  • Roger D. Feldman & Bryan E. Dowd, 1982. "Simulation of a Health Insurance Market with Adverse Selection," Operations Research, INFORMS, vol. 30(6), pages 1027-1042, December.
    • Handle: RePEc:inm:oropre:v:30:y:1982:i:6:p:1027-1042
    DOI: 10.1287/opre.30.6.1027
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    Citations

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    Cited by:

    1. Feldman, Roger & Dowd, Bryan, 2000. "Risk segmentation: goal or problem?," Journal of Health Economics, Elsevier, vol. 19(4), pages 499-512, July.
    2. Miller, Nolan, 2005. "Health Benefits and Wages: Minimizing Total Compensation Cost," Working Paper Series rwp05-029, Harvard University, John F. Kennedy School of Government.
    3. Baicker, Katherine & Chernew, Michael E. & Robbins, Jacob A., 2013. "The spillover effects of Medicare managed care: Medicare Advantage and hospital utilization," Journal of Health Economics, Elsevier, vol. 32(6), pages 1289-1300.
    4. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(3), pages 877-921.
    5. Neale Mahoney & E. Glen Weyl, 2017. "Imperfect Competition in Selection Markets," The Review of Economics and Statistics, MIT Press, vol. 99(4), pages 637-651, July.
    6. Shmueli, Amir, 2011. "Switching sickness funds in Israel: Adverse selection or risk selection? Some insights from the analysis of the relative costs of switchers," Health Policy, Elsevier, vol. 102(2), pages 247-254.
    7. Julie Shi, 2017. "Efficiency in Plan Choice with Risk Adjustment and Risk-Based Pricing in Health Insurance Exchanges," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(1), pages 79-113, January.
    8. Ellis, Randall P. & McGuire, Thomas G., 2007. "Predictability and predictiveness in health care spending," Journal of Health Economics, Elsevier, vol. 26(1), pages 25-48, January.
    9. Batata, Amber, 2004. "The effect of HMOs on fee-for-service health care expenditures: evidence from medicare revisited," Journal of Health Economics, Elsevier, vol. 23(5), pages 951-963, September.
    10. Roger Feldman & Gail Jensen & Bryan Dowd, 1984. "What Are Employers Doing To Create A Competitive Market For Health Care In The Twin Cities?," Contemporary Economic Policy, Western Economic Association International, vol. 3(2), pages 69-88, December.
    11. Srivatsa Srinivas, S. & Marathe, Rahul R., 2021. "Averting adverse selection: The Government of India's scheme to distribute affordable medicines," Socio-Economic Planning Sciences, Elsevier, vol. 78(C).
    12. 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.
    13. Miller, Nolan H., 2005. "Pricing health benefits: A cost-minimization approach," Journal of Health Economics, Elsevier, vol. 24(5), pages 931-949, September.
    14. Laurence C. Baker & Kenneth S. Corts, 1995. "The Effects of HMOs on Conventional Insurance Premiums: Theory and Evidence," NBER Working Papers 5356, National Bureau of Economic Research, Inc.
    15. Cao, Zhun & McGuire, Thomas G., 2003. "Service-level selection by HMOs in Medicare," Journal of Health Economics, Elsevier, vol. 22(6), pages 915-931, November.
    16. Glazer, Jacob & McGuire, Thomas G., 2011. "Gold and Silver health plans: Accommodating demand heterogeneity in managed competition," Journal of Health Economics, Elsevier, vol. 30(5), pages 1011-1019.

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