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Risk Corridors and Reinsurance in Health Insurance Marketplaces: Insurance for Insurers

Author

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  • Timothy J. Layton

    () (Harvard Medical School)

  • Thomas G. McGuire

    () (Harvard Medical School)

  • Anna D. Sinaiko

    () (Harvard School of Public Health)

Abstract

Health Insurance Marketplaces established by the Affordable Care Act implement reinsurance and risk corridors. Reinsurance limits insurer costs associated with specific individuals, while risk corridors protect against aggregate losses. Both tighten the insurer's distribution of expected costs. This paper compares the economic costs and consequences of reinsurance and risk corridors. We simulate the insurer's cost distribution under reinsurance and risk corridors using data for a group of individuals likely to enroll in Marketplace plans from the Medical Expenditure Panel Survey. We compare reinsurance and risk corridors in terms of risk reduction and incentives for cost containment. We find that reinsurance and one-sided risk corridors achieve comparable levels of risk reduction for a given level of incentives. We also find that the policies being implemented in the Marketplaces (a mix of reinsurance and two-sided risk corridor policies) substantially limit insurer risk but perform similarly to a simpler stand-alone reinsurance policy.

Suggested Citation

  • 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, Winter.
  • Handle: RePEc:tpr:amjhec:v:2:y:2016:i:1:p:66-95
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    Cited by:

    1. Daniel W. Sacks & Khoa Vu & Tsan-Yao Huang & Pinar Karaca-Mandic, 2017. "How do insurance firms respond to financial risk sharing regulations? Evidence from the Affordable Care Act," NBER Working Papers 24129, National Bureau of Economic Research, Inc.
    2. Lizhong Peng, 2017. "How Does Medicaid Expansion Affect Premiums in the Health Insurance Marketplaces? New Evidence from Late Adoption in Pennsylvania and Indiana," American Journal of Health Economics, MIT Press, vol. 3(4), pages 550-576, Fall.
    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. 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.
    5. Geruso, Michael & Layton, Timothy J. & McCormack, Grace & Shepard, Mark, 2019. "The Two Margin Problem in Insurance Markets," Working Paper Series rwp19-035, Harvard University, John F. Kennedy School of Government.
    6. Thomas G. McGuire & Sonja Schillo & Richard C. van Kleef, 2018. "Reinsurance, Repayments, and Risk Adjustment in Individual Health Insurance: Germany, The Netherlands and the U.S. Marketplaces," NBER Working Papers 25374, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    health insurance; insurance; insurers; reinsurance; Affordable Care Act; risk corridors; economic costs; marketplaces; policy;
    All these keywords.

    JEL classification:

    • I0 - Health, Education, and Welfare - - General
    • 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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