Using quantile regression for optimal risk adjustment
This paper analyzes optimal risk adjustment for direct risk selection (DRS). Integrating insurers activities for risk selection into a discrete choice model of individuals’ health insurance choice shows that DRS has the structure of a contest. For the contest success function used in most of the contest literature, optimal transfers for a risk adjustment scheme have to be determined by means of a restricted quantile regression, irrespective of whether insurers primarily engage in positive DRS (attracting low risks) or negative DRS (repelling high risks). This is at odds with the common practice of determining transfers by means of a least squares regression. However, this common practice can be rationalized within a discrete choice model for a new class of contest success functions, but only if positive and negative DRS are equally important; if not, optimal transfers have to be calculated from a restricted asymmetric least squares regression. Using data from a German and a Swiss health insurer, we find considerable differences between the three types of regressions. Optimal transfers therefore critically depend on which contest success function represents insurers’ incentives for DRS and whether positive and negative DRS are equally important or not. Results from the two data sets indicate that if a regulator does not know which case applies, transfers should rather be calculated by means of a quantile than a least squares regression.
|Date of creation:||2014|
|Date of revision:|
|Contact details of provider:|| Postal: B IV, VWL, D-54286 Trier|
Phone: +49 (0) 651 201-2739
Fax: +49 (0) 651 201-3934
Web page: http://www.uni-trier.de/index.php?id=2118
More information through EDIRC
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.:
- Roger Koenker & Kevin F. Hallock, 2001.
Journal of Economic Perspectives,
American Economic Association, vol. 15(4), pages 143-156, Fall.
- Stefan Szymanski, 2003. "The Economic Design of Sporting Contests," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1137-1187, December.
- Train,Kenneth E., 2009.
"Discrete Choice Methods with Simulation,"
Cambridge University Press, number 9780521766555, November.
- Michiel Bijlsma & Jan Boone & Gijsbert Zwart, 2014.
"Competition leverage: how the demand side affects optimal risk adjustment,"
RAND Journal of Economics,
RAND Corporation, vol. 45(4), pages 792-815, December.
- Bijlsma, Michiel & Boone, Jan & Zwart, Gijsbert, 2011. "Competition leverage: how the demand side affects optimal risk adjustment," CEPR Discussion Papers 8461, C.E.P.R. Discussion Papers.
- Michiel Bijlsma & Gijsbert Zwart & Jan Boone, 2011. "Competition leverage: How the demand side affects optimal risk adjustment," CPB Discussion Paper 181, CPB Netherlands Bureau for Economic Policy Analysis.
- Bijlsma, M. & Boone, J. & Zwart, G., 2011. "Competition Leverage : How the Demand Side Affects Optimal Risk Adjustment," Discussion Paper 2011-071, Tilburg University, Center for Economic Research.
- Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603, December.
- Nitzan, Shmuel, 1994. "Modelling rent-seeking contests," European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May.
- 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.
- 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.
- Ellis, Randall P. & McGuire, Thomas G., 2007.
"Predictability and predictiveness in health care spending,"
Journal of Health Economics,
Elsevier, vol. 26(1), pages 25-48, January.
- Randall P. Ellis & Thomas G. McGuire, 2006. "Predictability and Predictiveness in Health Care Spending," Boston University - Department of Economics - Working Papers Series WP2006-001, Boston University - Department of Economics.
- 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.
- Jack, William, 2006. "Optimal risk adjustment with adverse selection and spatial competition," Journal of Health Economics, Elsevier, vol. 25(5), pages 908-926, September.
- Cao, Zhun & McGuire, Thomas G., 2003. "Service-level selection by HMOs in Medicare," Journal of Health Economics, Elsevier, vol. 22(6), pages 915-931, November.
- Erik SCHOKKAERT & Carine VAN DE VOORDE, 2000.
"Risk Selection and the Specification of the Conventional Risk Adjustment Formula,"
Working Papers Department of Economics
ces0011, KU Leuven, Faculty of Economics and Business, Department of Economics.
- Schokkaert, Erik & Van de Voorde, Carine, 2004. "Risk selection and the specification of the conventional risk adjustment formula," Journal of Health Economics, Elsevier, vol. 23(6), pages 1237-1259, November.
- Yujing Shen & Randall P. Ellis, 2002. "How profitable is risk selection? A comparison of four risk adjustment models," Health Economics, John Wiley & Sons, Ltd., vol. 11(2), pages 165-174.
- Newey, Whitney K & Powell, James L, 1987. "Asymmetric Least Squares Estimation and Testing," Econometrica, Econometric Society, vol. 55(4), pages 819-47, July.
- Chernichovsky, Dov & van de Ven, Wynand P. M. M., 2003. "Risk adjustment in Europe," Health Policy, Elsevier, vol. 65(1), pages 1-3, July.
- Randall P. Ellis, 2012. "risk adjustment," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
- McGuire, Thomas G. & Glazer, Jacob & Newhouse, Joseph P. & Normand, Sharon-Lise & Shi, Julie & Sinaiko, Anna D. & Zuvekas, Samuel H., 2013. "Integrating risk adjustment and enrollee premiums in health plan payment," Journal of Health Economics, Elsevier, vol. 32(6), pages 1263-1277.
- 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.
When requesting a correction, please mention this item's handle: RePEc:trr:wpaper:201411. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthias Neuenkirch)
If references are entirely missing, you can add them using this form.