Optimal risk adjustment in a model with adverse selection and spatial competition
We develop a model that incorporates both spatial heterogeneity and adverse selection to examine the features of optimal prices paid by an agency purchasing a bundle of services on behalf of consumers with different underlying characteristics. Service bundles are two dimensional, and to be implementable a proposed allocation must respect incentive compatibility constraints. Equilibrium provision by a duopoly is characterized, and delivery of the constrained optimal bundles is possible, as long as providers are paid risk-adjusted fees for each individual they serve. When the payment can be made on the basis of an individual's type, it should be sufficient to cover the cost of delivering the socially optimal bundle for that person, plus a mark-up over cost. If payments can be made only on the basis of a partially informative signal, the optimal type-based payments should be adjusted according to a simple linear transformation, identified by Glazer and McGuire (2000). Finally, if payments differentiated by consumer type or signal are infeasible, subsidising the cost of one of the services relative to the other can improve welfare, but in general the constrained social optimum cannot be attained.
|Date of creation:||15 Apr 2004|
|Contact details of provider:|| Postal: Georgetown University Department of Economics Washington, DC 20057-1036|
Web page: http://econ.georgetown.edu/
|Order Information:|| Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036|
Web: http://econ.georgetown.edu/ Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Biglaiser, Gary & Ma, Ching-to Albert, 2003.
" Price and Quality Competition under Adverse Selection: Market Organization and Efficiency,"
RAND Journal of Economics,
The RAND Corporation, vol. 34(2), pages 266-286, Summer.
- Gary Biglaiser & Ching-to Albert Ma, 2000. "Price and Quality Competition under Adverse Selection: Market Organization and Efficiency," Papers 0102, Boston University - Industry Studies Programme.
- Ching-to A. Ma, 2004. "Managed care and shadow price," Health Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 199-202.
- Shen, Yujing & Ellis, Randall P., 2002. "Cost-minimizing risk adjustment," Journal of Health Economics, Elsevier, vol. 21(3), pages 515-530, May.
- Yujing Shen & Randall P. Ellis, 1999. "Cost-Minimizing Risk Adjustment," Papers 0097, Boston University - Industry Studies Programme.
- 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.
- 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.
- Richard G. Frank & Jacob Glazer & Thomas G. McGuire, 1998. "Measuring Adverse Selection in Managed Health Care," NBER Working Papers 6825, National Bureau of Economic Research, Inc.
- Olivella, Pau & Vera-Hernandez, Marcos, 2007. "Competition among differentiated health plans under adverse selection," Journal of Health Economics, Elsevier, vol. 26(2), pages 233-250, March.
- Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589, December.
- Jack, W., 1998. "Controlling Risk Selction Incentives when Health Insurance Contracts are Endogenous," Papers 341, Australian National University - Department of Economics.
- 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. Full references (including those not matched with items on IDEAS)