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Does service-level spending show evidence of selection across health plan types?

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  • Randall P. Ellis
  • Shenyi Jiang
  • Tzu-Chun Kuo

Abstract

We provide an explanation for the widespread finding that capitated managed care plans attract comparatively healthy, low cost enrollees relative to traditional unmanaged plans. Using disaggregated commercial insurance claims from the Thomson-Reuters MarketScan database, we show that managed care plans spend proportionally less on those types of services that are predicted to be more profitable to ration tightly using a selection index developed by Ellis and McGuire that captures the derivative of profits with respect to reduced spending on disaggregated services. Conventional diagnosis-based risk adjusted premiums reduce selection incentives by about 50% relative to premiums that are not risk-adjusted.

Suggested Citation

  • Randall P. Ellis & Shenyi Jiang & Tzu-Chun Kuo, 2013. "Does service-level spending show evidence of selection across health plan types?," Applied Economics, Taylor & Francis Journals, vol. 45(13), pages 1701-1712, May.
    • Handle: RePEc:taf:applec:45:y:2013:i:13:p:1701-1712
    DOI: 10.1080/00036846.2011.636023
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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. Partha Deb & Chenghui Li & Pravin K. Trivedi & David M. Zimmer, 2006. "The effect of managed care on use of health care services: results from two contemporaneous household surveys," Health Economics, John Wiley & Sons, Ltd., vol. 15(7), pages 743-760, July.
    3. Frank, Richard G. & Glazer, Jacob & McGuire, Thomas G., 2000. "Measuring adverse selection in managed health care," Journal of Health Economics, Elsevier, vol. 19(6), pages 829-854, November.
    4. Office of Health Economics, 2007. "The Economics of Health Care," For School 001490, Office of Health Economics.
    5. 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.
    6. Karen Eggleston & Anupa Bir, 2009. "Measuring Selection Incentives in Managed Care: Evidence From the Massachusetts State Employee Insurance Program," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 159-175, March.
    7. 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.
    8. Duarte, Fabian, 2012. "Price elasticity of expenditure across health care services," Journal of Health Economics, Elsevier, vol. 31(6), pages 824-841.
    9. Chad D. Meyerhoefer & Samuel H. Zuvekas, 2010. "New estimates of the demand for physical and mental health treatment," Health Economics, John Wiley & Sons, Ltd., vol. 19(3), pages 297-315, March.
    10. Arlene Ash & Randall P. Ellis & Gregory Pope & John Ayanian & David Bates & Helen Burstin & Lisa Iezzoni & Elizabeth McKay & Wei Yu, 2000. "Using Diagnoses to Describe Populations and Predict Costs," Papers 0099, Boston University - Industry Studies Programme.
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    Cited by:

    1. Randall P. Ellis & Pooja G. Mookim, 2013. "K-Fold Cross-Validation is Superior to Split Sample Validation for Risk Adjustment Models," Boston University - Department of Economics - Working Papers Series wp2013-026, Boston University - Department of Economics.
    2. Wynand Ven & Gerrit Hamstra & Richard Kleef & Mieke Reuser & Piet Stam, 2023. "The goal of risk equalization in regulated competitive health insurance markets," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 24(1), pages 111-123, February.
    3. A. A. Withagen-Koster & R. C. Kleef & F. Eijkenaar, 2020. "Incorporating self-reported health measures in risk equalization through constrained regression," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 21(4), pages 513-528, June.
    4. A. A. Withagen-Koster & R. C. Kleef & F. Eijkenaar, 2018. "Examining unpriced risk heterogeneity in the Dutch health insurance market," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(9), pages 1351-1363, December.
    5. Randall P. Ellis & Ching‐to Albert Ma, 2011. "Health insurance, cost expectations, and adverse job turnover," Health Economics, John Wiley & Sons, Ltd., vol. 20(1), pages 27-44, January.
    6. Richard C. Kleef & Thomas G. McGuire & René C. J. A. Vliet & Wynand P. P. M. de Ven, 2017. "Improving risk equalization with constrained regression," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 18(9), pages 1137-1156, December.
    7. 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.
    8. Randall P. Ellis & Juan Gabriel Fernandez, 2013. "Risk Selection, Risk Adjustment and Choice: Concepts and Lessons from the Americas," IJERPH, MDPI, vol. 10(11), pages 1-34, October.
    9. Withagen-Koster, Anja A. & van Kleef, Richard C. & Eijkenaar, Frank, 2023. "Predictable profits and losses in a health insurance market with risk equalization: A multiple-contract period perspective," Health Policy, Elsevier, vol. 131(C).
    10. Ellis, Randall P. & Jiang, Shenyi & Manning, Willard G., 2015. "Optimal health insurance for multiple goods and time periods," Journal of Health Economics, Elsevier, vol. 41(C), pages 89-106.
    11. McGuire, Thomas G. & Newhouse, Joseph P. & Normand, Sharon-Lise & Shi, Julie & Zuvekas, Samuel, 2014. "Assessing incentives for service-level selection in private health insurance exchanges," Journal of Health Economics, Elsevier, vol. 35(C), pages 47-63.
    12. Richard van Kleef & Thomas McGuire & Rene van Vliet & Wynand van de Ven, 2015. "Improving Risk Equalization with Constrained Regression," NBER Working Papers 21570, National Bureau of Economic Research, Inc.
    13. Shuli Brammli-Greenberg & Jacob Glazer & Ruth Waitzberg, 2019. "Modest risk-sharing significantly reduces health plans’ incentives for service distortion," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 20(9), pages 1359-1374, December.
    14. Daniel Montanera & Abhay Nath Mishra & T. S. Raghu, 2022. "Mitigating Risk Selection in Healthcare Entitlement Programs: A Beneficiary-Level Competitive Bidding Approach," Information Systems Research, INFORMS, vol. 33(4), pages 1221-1247, December.
    15. Wynand P. M. M. Ven & René C. J. A. Vliet & Richard C. Kleef, 2017. "How can the regulator show evidence of (no) risk selection in health insurance markets? Conceptual framework and empirical evidence," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 18(2), pages 167-180, March.
    16. Sungchul Park & Anirban Basu & Norma Coe & Fahad Khalil, 2017. "Service-level Selection: Strategic Risk Selection in Medicare Advantage in Response to Risk Adjustment," NBER Working Papers 24038, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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