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Risk Adjustment Schemes in Social Health Insurance: Adjusting for Cost Differences Between Insurance Plans

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  • Stefan Felder

Abstract

A risk adjustment scheme (RAS) within social health insurance is designed to prevent insurers from engaging in risk selection. This paper shows that with cost differences between insurance plans as they exist between managed-care and traditional insurance, current RASs create incentives for insurers to use risk adjusters for selecting risk types. We investigate on an alternative RAS, which ties transfers to the average cost levels of plans. This alternative RAS is shown not to induce risk selection; a welfare analysis however reveals that a corresponding reform will generally not result in a welfare gain.

Suggested Citation

  • Stefan Felder, 2006. "Risk Adjustment Schemes in Social Health Insurance: Adjusting for Cost Differences Between Insurance Plans," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(4), pages 500-515, February.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200602)61:4_500:rasish_2.0.tx_2-w
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    References listed on IDEAS

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    1. Thomas G. McGuire & Jacob Glazer, 2000. "Optimal Risk Adjustment in Markets with Adverse Selection: An Application to Managed Care," American Economic Review, American Economic Association, vol. 90(4), pages 1055-1071, September.
    2. Kifmann, Mathias, 2002. "Insuring Premium Risk in Competitive Health Insurance Markets," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 15, number urn:isbn:9783161477409.
    3. Glazer, Jacob & McGuire, Thomas G., 2002. "Setting health plan premiums to ensure efficient quality in health care: minimum variance optimal risk adjustment," Journal of Public Economics, Elsevier, vol. 84(2), pages 153-173, May.
    4. Pauly, Mark V., 1984. "Is cream-skimming a problem for the competitive medical market?," Journal of Health Economics, Elsevier, vol. 3(1), pages 87-95, April.
    5. Kifmann, Mathias, 2002. "Community rating in health insurance and different benefit packages," Journal of Health Economics, Elsevier, vol. 21(5), pages 719-737, September.
    6. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
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    More about this item

    Keywords

    health insurance; risk equalization schemes; risk selection; managed care;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • I1 - Health, Education, and Welfare - - Health
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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