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Optimal risk adjustment in a model with adverse selection and spatial competition

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Abstract

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.

Suggested Citation

  • William Jack(Georgetown University), 2004. "Optimal risk adjustment in a model with adverse selection and spatial competition," Working Papers gueconwpa~04-04-15, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~04-04-15
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    References listed on IDEAS

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    1. 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.
    2. Ching-to A. Ma, 2004. "Managed care and shadow price," Health Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 199-202.
    3. Shen, Yujing & Ellis, Randall P., 2002. "Cost-minimizing risk adjustment," Journal of Health Economics, Elsevier, vol. 21(3), pages 515-530, May.
    4. 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.
    5. 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.
    6. 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.
    7. Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589, January.
    8. Jack, W., 1998. "Controlling Risk Selction Incentives when Health Insurance Contracts are Endogenous," Papers 341, Australian National University - Department of Economics.
    9. 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.
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    Cited by:

    1. Jacob Glazer & Thomas G. McGuire, 2012. "Optimal Risk Adjustment," Chapters,in: The Elgar Companion to Health Economics, Second Edition, chapter 27 Edward Elgar Publishing.
      • Jacob Glazer & Thomas G. McGuire, 2006. "Optimal Risk Adjustment," Chapters,in: The Elgar Companion to Health Economics, chapter 26 Edward Elgar Publishing.
    2. Ronald Eduardo Gómez Suárez, 2007. "Cream-Skimming And Risk Adjustment in Colombian Health Insurance System:: The Public Insurer Case," ARCHIVOS DE ECONOMÍA 004295, DEPARTAMENTO NACIONAL DE PLANEACIÓN.

    More about this item

    Keywords

    Risk adjustment; adverse selection;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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