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The interaction of direct and indirect risk selection

  • Normann Lorenz
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    This paper analyzes the interaction of direct and indirect risk selection in health insurance markets. It is shown that direct risk selection – using measures unrelated to the benefit package like selective advertising or ‘losing’ applications of high risk individuals – nevertheless has an influence on the distortions of the benefit package caused by indirect risk selection. Direct risk selection (DRS) may either increase or decrease these distortions, depending on the type of equilibrium (pooling or separating), the type of DRS (positive or negative) and the type of cost for DRS (individual-specific or not). Regulators who succeed in reducing DRS by, e.g., banning excessive advertising or implementing fines for ‘losing’ applications, may therefore (unintentionally) mitigate or exacerbate the distortions of the benefit package caused by indirect risk selection. It is shown that the interaction of direct and indirect risk selection also alters the formula for optimal risk adjustment.

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    File URL: http://www.uni-trier.de/fileadmin/fb4/prof/VWL/EWF/Research_Papers/2014-12.pdf
    File Function: First version, 2014
    Download Restriction: no

    Paper provided by University of Trier, Department of Economics in its series Research Papers in Economics with number 2014-12.

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    Length: 25 pages
    Date of creation: 2014
    Date of revision:
    Handle: RePEc:trr:wpaper:201412
    Contact details of provider: Postal: B IV, VWL, D-54286 Trier
    Phone: +49 (0) 651 201-2739
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    Web page: http://www.uni-trier.de/index.php?id=2118

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    1. repec:cup:cbooks:9780521747387 is not listed on IDEAS
    2. repec:cup:cbooks:9780521766555 is not listed on IDEAS
    3. 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.
    4. 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.
    5. Bauhoff, Sebastian, 2012. "Do health plans risk-select? An audit study on Germany's Social Health Insurance," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 750-759.
    6. Randall P. Ellis, 2012. "risk adjustment," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    7. Jack, William, 2006. "Optimal risk adjustment with adverse selection and spatial competition," Journal of Health Economics, Elsevier, vol. 25(5), pages 908-926, September.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. Normann Lorenz, 2013. "Adverse selection and risk adjustment under imperfect competition," Research Papers in Economics 2013-05, University of Trier, Department of Economics.
    13. 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.
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