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Reinsurance, Repayments, and Risk Adjustment in Individual Health Insurance

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  • Thomas G. McGuire
  • Sonja Schillo
  • Richard C. van Kleef

Abstract

Reinsurance can complement risk adjustment of health plan payments to improve fit of payments to plan spending at the individual and group level. This paper proposes three improvements in health plan payment systems using reinsurance. First, we base reinsurance payments on spending not accounted for by the risk adjustment system, rather than just high spending. Second, we propose pairing reinsurance for individual-level losses with repayments for individual-level profits. Third, we optimize the weights on the risk adjustors taking account of the presence of reinsurance/repayment. We implement our methodology in data from Germany, the Netherlands and the US Marketplaces, comparing our modified approach to plan payment with risk adjustment as currently practiced in the three settings. The combination of the three improvements yields very substantial improvements in the individual-level fit of payments to plan spending in all three countries.

Suggested Citation

  • Thomas G. McGuire & Sonja Schillo & Richard C. van Kleef, 2020. "Reinsurance, Repayments, and Risk Adjustment in Individual Health Insurance," American Journal of Health Economics, University of Chicago Press, vol. 6(1), pages 139-168.
    • Handle: RePEc:ucp:amjhec:doi:10.1086/706796
    DOI: 10.1086/706796
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    Cited by:

    1. Stolper, Karel C.F. & Boonen, Lieke H.H.M. & Schut, Frederik T. & Varkevisser, Marco, 2022. "Do health insurers use target marketing as a tool for risk selection? Evidence from the Netherlands," Health Policy, Elsevier, vol. 126(2), pages 122-128.
    2. Richard C. van Kleef & René C. J. A. van Vliet, 2022. "How to deal with persistently low/high spenders in health plan payment systems?," Health Economics, John Wiley & Sons, Ltd., vol. 31(5), pages 784-805, May.
    3. 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).
    4. Thomas G. McGuire & Sonja Schillo & Richard C. Kleef, 2021. "Very high and low residual spenders in private health insurance markets: Germany, The Netherlands and the U.S. Marketplaces," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 22(1), pages 35-50, February.

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