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How profitable is risk selection? A comparison of four risk adjustment models

  • Yujing Shen
  • Randall P. Ellis

    (Department of Economics, Boston University, USA)

To mitigate selection triggered by capitation payments, risk-adjustment models bring capitation payments closer on average to individuals' expected expenditure. We examine the maximum potential profit that plans could hypothetically gain by using their own private information to select low-cost enrollees when payments are made using four commonly used risk adjustment models. Simulations using a privately insured sample suggest that risk selection profits remain substantial. The magnitude of potential profit varies according to the risk adjustment model and the private information plans can employ to identify profitable enrollees. Copyright © 2002 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.661
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Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 11 (2002)
Issue (Month): 2 ()
Pages: 165-174

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Handle: RePEc:wly:hlthec:v:11:y:2002:i:2:p:165-174
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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  1. Mullahy, John, 1998. "Much ado about two: reconsidering retransformation and the two-part model in health econometrics," Journal of Health Economics, Elsevier, vol. 17(3), pages 247-281, June.
  2. Van de ven, Wynand P.M.M. & Ellis, Randall P., 2000. "Risk adjustment in competitive health plan markets," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 14, pages 755-845 Elsevier.
  3. 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.
  4. Selden, Thomas M, 1998. "Risk Adjustment for Health Insurance: Theory and Implications," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 167-79, November.
  5. 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.
  6. Erik van Barneveld & Leida Lamers & René van Vliet & Wynand van de Ven, 2000. "Ignoring small predictable profits and losses: a new approach for measuring incentives for cream skimming," Health Care Management Science, Springer, vol. 3(2), pages 131-140, February.
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