Selection in insurance markets: theory and empirics in pictures

Scope and Incentives for Risk Selection in Health Insurance Markets With Regulated Competition: A Conceptual Framework and International Comparison

In health insurance markets with regulated competition, regulators face the challenge of preventing risk selection. This paper provides a framework for analyzing the scope (i.e., potential actions by insurers and consumers) and incentives for risk selection in such markets. Our approach consists of three steps. First, we describe four types of risk selection: (a) selection by consumers in and out of the market, (b) selection by consumers between high- and low-value plans, (c) selection by insurers via plan design, and (d) selection by insurers via other channels such as marketing, customer service, and supplementary insurance. In a second step, we develop a conceptual framework of how regulation and features of health insurance markets affect the scope and incentives for risk selection along these four dimensions. In a third step, we use this framework to compare nine health insurance markets with regulated competition in Australia, Europe, Israel, and the United States.

Selection and behavioral responses of health insurance subsidies in the long run: Evidence from a field experiment in Ghana

We study the effects of a health insurance subsidy in Ghana, where mandates are not enforceable. We randomly provide different levels of subsidy (1/3, 2/3, and full) and evaluate the impact at 7 months and 3 years after the intervention. We find that a one-time subsidy increased insurance enrollment for all groups in both the short and long runs, but health care utilization in the long run increased only for the partial subsidy group. We find supportive evidence that ex-post behavioral responses rather than ex-ante selective enrollment explain the long-run health care utilization results.

Corporate Social Responsibility and Directors' and Officers' Liability Risk: The Moderating Effect of Risk Environment and Growth Potential

Theoretical arguments regarding the effect of corporate social responsibility (CSR) on firm liability risk are abundant; however, empirical evidence about this relationship is scarce. We investigate the relationship between CSR and the personal liability risk of a firm's directors and officers. We argue that companies with better CSR performance represent a better underwriting risk for directors' and officers' (D&O) insurance providers and, therefore, have a lower cost of insurance. Our results show that firms with better CSR performance are more likely to purchase D&O insurance and have a lower premium-to-coverage ratio, known as the insurance rate-on-line. We also show that this risk-reduction effect is stronger for firms that operate in a high-risk environment and have higher sales growth. These results provide evidence that CSR can be used as a risk management tool to mitigate liability risk and suggest which firms benefit most from this effect.

Pricing above value: Selling to a market with selection problems

This paper shows that selection incentives in downstream markets distort upstream prices. It is possible for inputs to be priced above the value that the good has for final consumers. We apply this idea to pharmaceutical companies selling drugs to a health insurance market with selection problems. We specify the conditions under which drugs are sold at prices exceeding treatment value. Another feature of the model is an excessive private incentive to reduce market size, e.g. in the form of personalized medicine.

Risk Adjustment in Health Insurance Markets: Do Not Overlook the "Real" Healthy

OBJECTIVES

The goals of this paper are (1) to identify groups of healthy people and (2) to quantify the extent to which the Dutch risk adjustment (RA) model overpays insurers for these groups.

BACKGROUND

There have been strong signals that insurers in the Dutch regulated health insurance market engage in actions to attract healthy people. A potential explanation for this behavior is that the Dutch RA model overpays insurers for healthy people.

METHODS

We identify healthy groups using 3 types of ex-ante information (ie, information available before the start of the health insurance contract): administrative data on prior spending for specific health care services (N = 17 m), diagnoses from electronic patient records (N = 1.3 m), and health survey data (N = 457 k). In a second step, we calculate the under/overpayment for these groups under the Dutch RA model (version: 2021).

RESULTS

We distinguish eight groups of healthy people using various "identifiers." Although the Dutch RA model substantially reduces the predictable profits that insurers face for these groups, significant profits remain. The mean per person overpayment ranges from 38 euros (people with hospital spending below the third quartile in each of 3 prior years) to 167 euros (those without any medical condition according to their electronic patient record).

CONCLUSIONS

The Dutch RA model does not eliminate the profitability of healthy groups. The identifiers used for flagging these groups, however, seem inappropriate for serving as risk adjuster variables. An alternative way of exploiting these identifiers and eliminating the profitability of healthy groups is to estimate RA models with "constrained regression."

Lapses in Long-Term Care Insurance

About a quarter of long-term care insurance (LTCI) policy holders aged 65 let their policies lapse prior to death, forfeiting all benefits. We find that lapse rates are substantially higher among the cognitively impaired in the Health and Retirement Study. This generates a pernicious form of dynamic advantageous selection, as the cognitively impaired are more likely to use care. Simulations show that an inappropriately optimistic asset drawdown path further increases the individual welfare cost of unanticipated lapses. Meanwhile, we find evidence of a significant but very small role for either strategic or financial motives for lapsing.

Adverse selection and health insurance decisions of young migrant workers: An empirical study in China

Using data from the China Migrants Dynamic Survey (CMDS) in 2017, this study assessed adverse selection and the impact of mobility factors on adverse selection by analyzing two samples of young migrant workers. The results of the sample analysis showed that young migrant workers with higher health risks were more inclined to enroll in health insurance, indicating the presence of adverse selection. Mobility distance and settle intention have a heterogeneous effect on adverse selection, with young workers who migrate inter-provincially and intend to settle down being more susceptible. The analysis of the insured samples showed that the phenomenon of adverse selection was also evident in the choice of health insurance, with individuals with higher risks preferring Urban Employee Basic Medical Insurance (UEBMI), which has better financial coverage and benefits compared to Rural Residents' Basic Medical Insurance (URRBMI). The heterogeneity test confirmed that mobility distance plays a role in determining the likelihood of adverse selection, with inter-city and inter-province young migrant workers being more likely to show adverse selection.

The Two-Margin Problem in Insurance Markets

Insurance markets often feature consumer sorting along both an extensive margin (whether to buy) and an intensive margin (which plan to buy). We present a new graphical theoretical framework that extends a workhorse model to incorporate both selection margins simultaneously. A key insight from our framework is that policies aimed at addressing one margin of selection often involve an economically meaningful trade-off on the other margin in terms of prices, enrollment, and welfare. Using data from Massachusetts, we illustrate these trade-offs in an empirical sufficient statistics approach that is tightly linked to the graphical framework we develop.

Voluntary private health insurance demand by Portuguese seniors before the COVID-19 pandemic

AIMS

The Portuguese health system is mainly described as a National Health Service (NHS), but it also has some Bismarckian features. On top of these two layers of health insurance coverage, there is a market for voluntary private health insurance (VPHI). Usually, seniors are not eligible for this type of health insurance and this may serve as a complement or supplement to the NHS. The purpose of this work is to identify the main factors associated with holding a VPHI policy among seniors before the COVID-19 pandemic.

MATERIAL AND METHODS

We use data collected by the National Health Survey of 2019/20 and estimate a multivariate logistic regression.

RESULTS

The main findings show that VPHI may be bought by seniors as a facilitator to access health care, either specialised or dental care. While oral health is not covered by the NHS, specialist care is only available after referral by a gatekeeper and requires a long waiting time to be scheduled. Results show that people who had an appointment with a dentist or a specialist in the last 12 months are more likely to have a VPHI policy. Additionally, it was found that people benefiting from occupation-based insurance schemes are less likely to buy private health insurance.

CONCLUSION

The current Portuguese health system organization based on different layers of health protection raises some issues concerning equity to health care access by seniors.

How to deal with persistently low/high spenders in health plan payment systems?

Health insurance markets with community-rated premiums typically include risk adjustment (RA) to mitigate selection problems. Over the past decades, RA systems have evolved from simple demographic models to sophisticated morbidity-based models. Even the most sophisticated models, however, tend to overcompensate people with persistently low spending and undercompensate those with persistently high spending. This paper compares three methods that exploit spending-level persistence for improving health plan payment systems: (1) implementation of spending-based risk adjustors, (2) implementation of high-risk pooling for people with multiple-year high spending, and (3) indirect use of spending persistence via constrained regression. Based on incentive measures for risk selection and cost control, we conclude that a combination of the last two options can substantially outperform the first, which is currently used in the health plan payment system in the Netherlands.

The Demand for Insurance and Rationale for a Mandate: Evidence from Workers' Compensation Insurance

Workers' compensation insurance, which provides no-fault coverage for work-related injuries, is mandatory in nearly all states. We use administrative data from a unique market without a coverage mandate to estimate the demand for workers' compensation insurance, leveraging regulatory premium updates for identification. We find that a 1 percent increase in premiums leads to approximately a 0.3 percent decline in coverage. Drawing upon these estimates and data on costs, we examine potential justifications for government intervention to increase coverage. This analysis suggests that several forms of market failure-such as adverse selection, market power, and externalities-may not justify a mandate in this setting.

Beyond Causality: Additional Benefits of Randomized Controlled Trials for Improving Health Care Delivery

Policy Points Policymakers at federal and state agencies, health systems, payers, and providers need rigorous evidence for strategies to improve health care delivery and population health. This is all the more urgent now, during the COVID-19 pandemic and its aftermath, especially among low-income communities and communities of color. Randomized controlled trials (RCTs) are known for their ability to produce credible causal impact estimates, which is why they are used to evaluate the safety and efficacy of drugs and, increasingly, to evaluate health care delivery and policy. But RCTs provide other benefits, allowing policymakers and researchers to: 1) design studies to answer the question they want to answer, 2) test theory and mechanisms to help enrich understanding beyond the results of a single study, 3) examine potentially subtle, indirect effects of a program or policy, and 4) collaborate closely to generate policy-relevant findings. Illustrating each of these points with examples of recent RCTs in health care, we demonstrate how policymakers can utilize RCTs to solve pressing challenges.

Growth In ACA-Compliant Marketplace Enrollment And Spending Risk Changes During The COVID-19 Pandemic

In 2020 the COVID-19 pandemic caused millions to lose their jobs and, consequently, their employer-sponsored health insurance. Enacted in 2010, the Affordable Care Act (ACA) created safeguards for such events by expanding Medicaid coverage and establishing Marketplaces through which people could purchase health insurance. Using a novel national data set with information on ACA-compliant individual insurance plans, we found large increases in Marketplace enrollment in 2020 compared with 2019 but with varying percentage increases and spending risk implications across states. States that did not expand Medicaid had enrollment and spending risk increases. States that expanded Medicaid but did not relax 2020 Marketplace enrollment criteria also had spending risk increases. In contrast, states that expanded Medicaid and relaxed 2020 enrollment criteria experienced enrollment increases without spending risk changes. The findings are reassuring with respect to the ability of Marketplaces to buffer employment shocks, but they also provide cautionary signals that risks and premiums could begin to rise either in the absence of Medicaid expansion or when Marketplace enrollment is constrained.

Delivering health insurance through informal financial groups: Evidence on moral hazard and adverse selection

Moral hazard and adverse selection are potential explanations for missing health insurance in low-income countries. In recent years, informal financial institutions have attempted to complete health insurance markets by offering micro health insurance (MHI). We evaluate an MHI offered through informal financial institutions (Self-Help Groups) in Maharashtra, India. Exploiting random assignment of when villages were offered the MHI, we do not find support for MHI increasing health care utilization. In contrast, we do find evidence for adverse selection: enrollees are significantly more likely than non-enrollees to report poor health prior to the introduction of MHI. This adverse selection persists even when the MHI is offered as a group insurance to Self-Help Groups, as opposed to individual insurance. Our results suggest that MHI offered through informal financial groups may not suffer from moral hazard, but does fall short of eliminating adverse selection.

Selection Incentives for Health Insurers in the Presence of Sophisticated Risk Adjustment

This article analyzes selection incentives for insurers in the Dutch basic health insurance market, which operates with community-rated premiums and sophisticated risk adjustment. Selection incentives result from the interplay of three market characteristics: possible actions by insurers, consumer response to these actions, and predictable variation in profitability of insurance contracts. After a qualitative analysis of the first two characteristics our primary objective is to identify the third. Using a combination of claims data (N = 16.8 million) and survey information (N = 387,195), we find substantial predictable variation in profitability. On average, people in good health are profitable, while those in poor health are unprofitable. We conclude that Dutch insurers indeed face selection incentives. A complete measure of selection incentives, however, captures the correlation between individual-level profitability and consumer response to insurer-actions. Obtaining insight in this correlation is an important direction for further research.

Estimating the causal effects of private health insurance in Brazil: Evidence from a regression kink design

Despite having free access to the public health system, 25% of the Brazilian population have a private insurance plan, which is subsidized by the government by means of an income tax rebate. This paper explores this rebate to tackle the potential endogeneity between private insurance and the demand for health services, using the fiscal incentive as a source of quasi-experimental variation in insurance prices. We estimate the average effect of private insurance for the marginal individuals at the kink points by means of a nonseparable nonparametric regression model. Our data allow us to disentangle moral hazard from adverse selection effects and the results indicate that private insurance has a positive impact on the use of preventive services, health outcomes, physical exercises, and smoke quiting, and does not impact the use of nonpreventive health services, such as inpatient services and surgeries.

Resilience through the Financialisation of Risks? The Case of a Dairy System in Northwest Germany

State support for financial risk management schemes has been introduced in numerous agricultural policies to enhance farming system resilience in response to increased income fluctuations and partially reduced producer support levels in the agricultural sector. In order to better understand how financialisation of risks can contribute to an actual improvement of specific farming systems’ resilience, this study investigates its effects with regards to dairy farming. Based on an in-depth case study of a dairy system in Northwest Germany, multilayered challenges faced by the farm system are identified, resilience strategies investigated and the role of financial risk management evaluated. In doing so, the resilience assessment framework developed by Meuwissen et al. (2019) is applied in order to analyse the systems’ capacity to resist, adapt or transform in response to external challenges threatening the provision of system’ functions. The results indicate a high relevance of insurances and savings with regards to the system’s robustness against short-term shocks. However, to address the various long-term pressures, resilience-enhancing attributes that increase the system’s capacity to adapt and transform would need to be strengthened. In particular, more cooperation and knowledge transfer beyond system boundaries could contribute to a holistic risk management allowing for improved farming system resilience.

Selection in employer sponsored health insurance

This paper examines the extensive margin of selection into employer-sponsored health insurance (ESHI) using data from the Medical Expenditures Panel Survey 2001-2010 and 2014-2016 and the National Longitudinal Survey of Youth'97 in 2010. Controlling for a large set of firm and job characteristics, I find that before the implementation of the Affordable Care Act (ACA) in 2014, workers aged 25-40 who declined ESHI and remained privately uninsured had significantly higher health risk than those who enrolled. No correlation between health and insurance take-up is found in the 41-64 age group. These results are partly explained by differences in income and Medicaid crowding out ESHI for high risk workers. The paper sheds light on the characteristics of uninsured workers, their incentives for declining insurance and the interaction between private and public health insurance. The allocation of ESHI remained unchanged after the ACA was introduced due to the provisions' counteracting effects.

How is the trade-off between adverse selection and discrimination risk affected by genetic testing? Theory and experiment

We develop a theoretical analysis of two widely used regulations of genetic tests, Disclosure Duty and Consent Law, and we run an experiment in order to shed light on both the take-up rate of genetic testing and on the comparison of policyholders' welfare under the two regulations. Disclosure duty forces individuals to reveal their test results to insurers, exposing them to a discrimination risk. Consent Law allows them to hide any detrimental information, resulting in adverse selection. The experiment results in much lower genetic tests take-up rates with Disclosure Duty than with Consent Law, showing that subjects are very sensitive to the discrimination risk. Under Consent Law, take-up rates increase with the adverse selection intensity. A decrease in the test cost, and in adverse selection intensity, both make it more likely that Consent Law is preferred to Disclosure Duty.

Estimating the Value of Public Insurance Using Complementary Private Insurance

The welfare associated with public insurance is often difficult to quantify because the demand for coverage is unobserved and thus cannot be used to analyze welfare. However, in many settings, individuals can purchase private insurance to supplement public coverage. This paper outlines an approach to use data and variation from private complementary insurance to quantify welfare associated with counterfactuals related to compulsory public insurance. We then apply this approach using administrative data on disability insurance. Our findings suggests that public disability insurance generates substantial surplus for the sample population, and there may be gains to increasing the generosity of coverage.

The Comparative Advantage of Medicare Advantage

We ascertain the degree of service-level selection in Medicare Advantage (MA) using individual level data on the 100 most frequent HCC's or combination of HCC's from two national insurers in 2012-2013. We find differences in the distribution of beneficiaries across HCC's between TM and MA, principally in the smaller share of MA enrollees with no coded HCC, consistent with greater coding intensity in MA. Among those with an HCC code, absolute differences between MA and TM shares of beneficiaries are small, consistent with little service-level selection. Variation in HCC margins does not predict differences between an HCC's share of MA and TM enrollees, although one cannot a priori sign a relationship between margin and service-level selection. Margins are negatively associated with the importance of post-acute care in the HCC. Margins among common chronic disease classes amenable to medical management and typically managed by primary care physicians are larger than among diseases typically managed by specialists. These margin differences by disease are robust against a test for coding effects and suggest that the average technical efficiency of MA relative to TM may vary by diagnosis. If so, service-level selection on the basis of relative technical efficiency could be welfare enhancing.

Selection Incentives for Health Insurers in the Presence of Sophisticated Risk Adjustment

This article analyzes selection incentives for insurers in the Dutch basic health insurance market, which operates with community-rated premiums and sophisticated risk adjustment. Selection incentives result from the interplay of three market characteristics: possible actions by insurers, consumer response to these actions, and predictable variation in profitability of insurance contracts. After a qualitative analysis of the first two characteristics our primary objective is to identify the third. Using a combination of claims data (N = 16.8 million) and survey information (N = 387,195), we find substantial predictable variation in profitability. On average, people in good health are profitable, while those in poor health are unprofitable. We conclude that Dutch insurers indeed face selection incentives. A complete measure of selection incentives, however, captures the correlation between individual-level profitability and consumer response to insurer-actions. Obtaining insight in this correlation is an important direction for further research.

Examining unpriced risk heterogeneity in the Dutch health insurance market

A major challenge in regulated health insurance markets is to mitigate risk selection potential. Risk selection can occur in the presence of unpriced risk heterogeneity, which refers to predictable variation in health care spending not reflected in either premiums by insurers or risk equalization payments. This paper examines unpriced risk heterogeneity within risk groups distinguished by the sophisticated Dutch risk equalization model of 2016. Our strategy is to combine the administrative dataset used for estimation of the risk equalization model (n = 16.9 million) with information derived from a large health survey (n = 387k). The survey information allows for explaining and predicting residual spending of the risk equalization model. Based on the predicted residual spending, two metrics are used to indicate unpriced risk heterogeneity at the individual level and at the level of certain (risk) groups: the correlation coefficient between residual spending and predicted residual spending, and the mean absolute value of predicted residual spending. The analyses yield three main findings: (1) the health survey information is able to explain some residual spending of the risk equalization model, (2) unpriced risk heterogeneity exists both in morbidity and in non-morbidity groups, and (3) unpriced risk heterogeneity increases with predicted spending by the risk equalization model. These findings imply that the sophisticated Dutch risk equalization model does not completely remove unpriced risk heterogeneity. Further improvement of the model should focus on broadening and refining the current set of morbidity-based risk adjusters.

Risk equalization in competitive health insurance markets: Identifying healthy individuals on the basis of multiple-year low spending

Objective

To study the extent to which risk equalization (RE) in competitive health insurance markets can be improved by including an indicator for being healthy.

Study Setting/Data Sources

This study is conducted in the context of the Dutch individual health insurance market. Administrative data on spending and risk characteristics (2011‐2014) for the entire population (N = 16.6 m) as well as health survey data from a large sample (N = 387 k) are used.

Study Design

The indicator for being healthy is low spending in three consecutive prior years. “Low spending” is defined in three ways: belonging to the bottom 60%, 70%, or 80% of the annual spending distribution. Versions of the Dutch RE model 2017 with and without the indicator are compared on individual‐level payment fit and, using the survey data, group‐level payment fit.

Principal Findings

All three alternative models outperform the Dutch RE model 2017. However, significant unpriced risk heterogeneity remains. Compared with the 60% threshold, the 80% threshold comes with a larger improvement in fit but identifies a less selective group.

Conclusions

The performance of the RE model can be improved by adding an indicator for being healthy based on multiple‐year low spending. However, risk‐selection potential remains, warranting high priority to further improvement of RE.

Deriving risk adjustment payment weights to maximize efficiency of health insurance markets

Risk-adjustment is critical to the functioning of regulated health insurance markets. To date, estimation and evaluation of a risk-adjustment model has been based on statistical rather than economic objective functions. We develop a framework where the objective of risk-adjustment is to minimize the efficiency loss from service-level distortions due to adverse selection, and we use the framework to develop a welfare-grounded method for estimating risk-adjustment weights. We show that when the number of risk adjustor variables exceeds the number of decisions plans make about service allocations, incentives for service-level distortion can always be eliminated via a constrained least-squares regression. When the number of plan service-level allocation decisions exceeds the number of risk-adjusters, the optimal weights can be found by an OLS regression on a straightforward transformation of the data. We illustrate this method with the data used to estimate risk-adjustment payment weights in the Netherlands (N = 16.5 million).

Moral Hazard in Health Insurance: What We Know and How We Know It

We describe research on the impact of health insurance on healthcare spending ("moral hazard"), and use this context to illustrate the value of and important complementarities between different empirical approaches. One common approach is to emphasize a credible research design; we review results from two randomized experiments, as well as some quasi-experimental studies. This work has produced compelling evidence that moral hazard in health insurance exists-that is, individuals, on average, consume less healthcare when they are required to pay more for it out of pocket-as well as qualitative evidence about its nature. These studies alone, however, provide little guidance for forecasting healthcare spending under contracts not directly observed in the data. Therefore, a second and complementary approach is to develop an economic model that can be used out of sample. We note that modeling choices can be consequential: different economic models may fit the reduced form but deliver different counterfactual predictions. An additional role of the more descriptive analyses is therefore to provide guidance regarding model choice.

Selection in Health Insurance Markets and Its Policy Remedies

Selection (adverse or advantageous) is the central problem that inhibits the smooth, efficient functioning of competitive health insurance markets. Even—and perhaps especially—when consumers are well-informed decision makers and insurance markets are highly competitive and offer choice, such markets may function inefficiently due to risk selection. Selection can cause markets to unravel with skyrocketing premiums and can cause consumers to be under- or overinsured. In its simplest form, adverse selection arises due to the tendency of those who expect to incur high health care costs in the future to be the most motivated purchasers. The costlier enrollees are more likely to become insured rather than to remain uninsured, and conditional on having health insurance, the costlier enrollees sort themselves to the more generous plans in the choice set. These dual problems represent the primary concerns for policymakers designing regulations for health insurance markets. In this essay, we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates. We emphasize the two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage (the private plan option available under Medicare) and the state-level individual insurance markets.

The Great Recession and Workers' Health Benefits

During a recession, cost-sharing of employer-sponsored health benefits could increase to reduce labor costs in the U.S. Using a variation in the severity of recession shocks across industries, I find evidence that the enrollment rate of high deductible health plans (HDHPs) among workers covered by employer-sponsored health benefits increased more among firms in industries that experienced severe recession shocks. As potential mechanisms, I study employer-side and worker-side mechanisms. I find that employers changed health benefit offerings to force or incentivize workers to enroll in HDHPs. But I find little evidence of an increase in workers' demand for HDHPs due to a reduction in income. These results suggest that the HDHP enrollment rate increased during the Great Recession, as employers tried to save costs of offering health benefits.

Implications of family risk pooling for individual health insurance markets

While family purchase of health insurance may benefit insurance markets by pooling individual risk into family groups, the correlation across illness types in families could exacerbate adverse selection. We analyze the impact of family pooling on risk for health insurers to inform policy about family-level insurance plans. Using data on 8,927,918 enrollees in fee-for-service commercial health plans in the 2013 Truven MarketScan database, we compare the distribution of annual individual health spending across four pooling scenarios: (1) "Individual" where there is no pooling into families; (2) "real families" where costs are pooled within families; (3) "random groups" where costs are pooled within randomly generated small groups that mimic families in group size; and (4) "the Sims" where costs are pooled within random small groups which match families in demographics and size. These four simulations allow us to identify the separate contributions of group size, group composition, and family affinity in family risk pooling. Variation in individual spending under family pooling is very similar to that within "simulated families" and to that within random groups, and substantially lower than when there is no family pooling and individuals choose independently (standard deviation $12,526 vs $11,919, $12,521 and $17,890 respectively). Within-family correlations in health status and utilization do not "undo" the gains from family pooling of risks. Family pooling can mitigate selection and improve the functioning of health insurance markets.

Paying Medicare Advantage plans: To level or tilt the playing field

Medicare beneficiaries are eligible for health insurance through the public option of traditional Medicare (TM) or may join a private Medicare Advantage (MA) plan. Both are highly subsidized but in different ways. Medicare pays for most of costs directly in TM, and subsidizes MA plans based on a "benchmark" for each beneficiary choosing a private plan. The level of this benchmark is arguably the most important policy decision Medicare makes about the MA program. Many analysts recommend equalizing Medicare's subsidy across the options - referred to in policy circles as a "level playing field." This paper studies the normative question of how to set the level of the benchmark, applying the versatile model developed by Einav and Finkelstein (EF) to Medicare. The EF framework implies unequal subsidies to counteract risk selection across plan types. We also study other reasons to tilt the field: the relative efficiency of MA vs. TM, market power of MA plans, and institutional features of the way Medicare determines subsidies and premiums. After review of the empirical and policy literature, we conclude that in areas where the MA market is competitive, the benchmark should be set below average costs in TM, but in areas characterized by imperfect competition in MA, it should be raised in order to offset output (enrollment) restrictions by plans with market power. We also recommend specific modifications of Medicare rules to make demand for MA more price elastic.

Insurers' response to selection risk: Evidence from Medicare enrollment reforms

Evidence on insurers' behavior in environments with both risk selection and market power is largely missing. We fill this gap by providing one of the first empirical accounts of how insurers adjust plan features when faced with potential changes in selection. Our strategy exploits a 2012 reform allowing Medicare enrollees to switch to 5-star contracts at anytime. This policy increased enrollment into 5-star contracts, but without risk selection worsening. Our findings show that this is due to 5-star plans lowering both premiums and generosity, thus becoming more appealing for most beneficiaries, but less so for those in worse health conditions.

Measuring efficiency of health plan payment systems in managed competition health insurance markets

Adverse selection in health insurance markets leads to two types of inefficiency. On the demand side, adverse selection leads to plan price distortions resulting in inefficient sorting of consumers across health plans. On the supply side, adverse selection creates incentives for plans to inefficiently distort benefits to attract profitable enrollees. Reinsurance, risk adjustment, and premium categories address these problems. Building on prior research on health plan payment system evaluation, we develop measures of the efficiency consequences of price and benefit distortions under a given payment system. Our measures are based on explicit economic models of insurer behavior under adverse selection, incorporate multiple features of plan payment systems, and can be calculated prior to observing actual insurer and consumer behavior. We illustrate the use of these measures with data from a simulated market for individual health insurance.

Supplemental health insurance in the Colombian managed care system: Adverse or advantageous selection?

The aim of this article is to estimate the type of selection that exists in the supplemental health insurance market in Colombia where compulsory coverage is implemented through managed care competition. We build a panel database that combines individuals' information from the Ministry of Health and a database provided by two private health insurers. We perform the correlation test for consumption of health services frequency and supplemental coverage. Following Fang et al. (2008), we condition the estimation on health controls that are available to the econometrician but not to insurers. In both cases we obtain a positive correlation, suggesting that adverse selection predominates. In order to rule out some moral hazard effects, we estimate the correlation between previous frequency of healthcare service consumption and supplemental insurance purchase. The positive correlation obtained is robust to the inclusion of controls for diagnosis implemented by health insurers, suggesting that despite some risk selection strategies, they are not protected from adverse selection. We conclude that some subsidies to supplemental coverage purchase would lower public expenditure in Colombia.

Imperfect risk adjustment, risk preferences, and sorting in competitive health insurance markets

I develop a model of insurer price-setting and consumer welfare under risk-adjustment, a policy commonly used to combat inefficient sorting due to adverse selection in health insurance markets. I use the model to illustrate graphically that risk-adjustment causes health plan prices to be based on costs not predicted by the risk-adjustment model ("residual costs") rather than total costs, either weakening or exacerbating selection problems depending on the correlation between demand and costs predicted by the risk-adjustment model. I then use a structural model to estimate the welfare consequences of risk-adjustment, finding a welfare gain of over $600 per person-year.

The Questionable Value of Having a Choice of Levels of Health Insurance Coverage

In most health insurance markets in the United States, consumers have substantial choice about their health insurance plan. However additional choice is not an unmixed blessing as it creates challenges related to both consumer confusion and adverse selection. There is mounting evidence that many people have difficulty understanding the value of insurance coverage, like evaluating the relative benefits of lower premiums versus lower deductibles. Also, in most US health insurance markets, people cannot be charged different prices for insurance based on their individual level of health risk. This creates the potential for well-known problems of adverse selection because people will often base the level of health insurance coverage they choose partly on their health status. In this essay, we examine how the forces of consumer confusion and adverse selection interact with each other and with market institutions to affect how valuable it is to have multiple levels of health insurance coverage available in the market.

Delivering Public Health Insurance Through Private Plan Choice in the United States

The United States has seen a sea change in the way that publicly financed health insurance coverage is provided to low-income, elderly, and disabled enrollees. When programs such as Medicare and Medicaid were introduced in the 1960s, the government directly reimbursed medical providers for the care that they provided, through a classic “single payer system.” Since the mid-1980s, however, there has been an evolution towards a model where the government subsidizes enrollees who choose among privately provided insurance options. In the United States, privatized delivery of public health insurance appears to be here to stay, with debates now focused on how much to expand its reach. Yet such privatized delivery raises a variety of thorny issues. Will choice among private insurance options lead to adverse selection and market failures in privatized insurance markets? Can individuals choose appropriately over a wide range of expensive and confusing plan options? Will a privatized approach deliver the promised increases in delivery efficiency claimed by advocates? What policy mechanisms have been used, or might be used, to address these issues? A growing literature in health economics has begun to make headway on these questions. In this essay, I discuss that literature and the lessons for both economics more generally and health care policymakers more specifically.

A Machine Learning Framework for Plan Payment Risk Adjustment

OBJECTIVE

To introduce cross-validation and a nonparametric machine learning framework for plan payment risk adjustment and then assess whether they have the potential to improve risk adjustment.

DATA SOURCES

2011-2012 Truven MarketScan database.

STUDY DESIGN

We compare the performance of multiple statistical approaches within a broad machine learning framework for estimation of risk adjustment formulas. Total annual expenditure was predicted using age, sex, geography, inpatient diagnoses, and hierarchical condition category variables. The methods included regression, penalized regression, decision trees, neural networks, and an ensemble super learner, all in concert with screening algorithms that reduce the set of variables considered. The performance of these methods was compared based on cross-validated R2 .

PRINCIPAL FINDINGS

Our results indicate that a simplified risk adjustment formula selected via this nonparametric framework maintains much of the efficiency of a traditional larger formula. The ensemble approach also outperformed classical regression and all other algorithms studied.

CONCLUSIONS

The implementation of cross-validated machine learning techniques provides novel insight into risk adjustment estimation, possibly allowing for a simplified formula, thereby reducing incentives for increased coding intensity as well as the ability of insurers to "game" the system with aggressive diagnostic upcoding.

Reform of the Individual Insurance Market in New Jersey: Lessons for the Affordable Care Act

The individual health insurance market has played a small but important role in providing coverage to those without access to group insurance or public programs. With implementation of the Affordable Care Act (ACA), the individual market has attained a more prominent role. However, achieving accessible and affordable coverage in this market is a long-standing challenge, in large part due to the threat of adverse risk selection. New Jersey pursued comprehensive reforms beginning in the 1990s to achieve a stable, accessible, and affordable individual market. We review how adverse risk selection can pose a challenge to achieving such objectives in the individual health insurance market. We follow this discussion by describing the experience of New Jersey through three rounds of legislative reform and through the first year of the implementation of the ACA coverage provisions. While the New Jersey reforms did not require individuals to purchase coverage, its experiences with direct and indirect market subsidies and regulations guiding plan design, issuance, and rating have important implications for how the ACA may achieve its coverage goals in the absence of the controversial individual purchase mandate.

RISK CORRIDORS AND REINSURANCE IN HEALTH INSURANCE MARKETPLACES: Insurance for Insurers

Health Insurance Marketplaces established by the Affordable Care Act implement reinsurance and risk corridors. Reinsurance limits insurer costs associated with specific individuals, while risk corridors protect against aggregate losses. Both tighten the insurer's distribution of expected costs. This paper compares the economic costs and consequences of reinsurance and risk corridors. We simulate the insurer's cost distribution under reinsurance and risk corridors using data for a group of individuals likely to enroll in Marketplace plans from the Medical Expenditure Panel Survey. We compare reinsurance and risk corridors in terms of risk reduction and incentives for cost containment. We find that reinsurance and one-sided risk corridors achieve comparable levels of risk reduction for a given level of incentives. We also find that the policies being implemented in the Marketplaces (a mix of reinsurance and two-sided risk corridor policies) substantially limit insurer risk but perform similarly to a simpler stand-alone reinsurance policy.

Employer contribution and premium growth in health insurance

We study whether employer premium contribution schemes could impact the pricing behavior of health plans and contribute to rising premiums. Using 1991-2011 data before and after a 1999 premium subsidy policy change in the Federal Employees Health Benefits Program (FEHBP), we find that the employer premium contribution scheme has a differential impact on health plan pricing based on two market incentives: 1) consumers are less price sensitive when they only need to pay part of the premium increase, and 2) each health plan has an incentive to increase the employer's premium contribution to that plan. Both incentives are found to contribute to premium growth. Counterfactual simulation shows that average premium would have been 10% less than observed and the federal government would have saved 15% per year on its premium contribution had the subsidy policy change not occurred in the FEHBP. We discuss the potential of similar incentives in other government-subsidized insurance systems such as the Medicare Part D and the Health Insurance Marketplace under the Affordable Care Act.

HOW MUCH FAVORABLE SELECTION IS LEFT IN MEDICARE ADVANTAGE?

The health economics literature contains two models of selection, one with endogenous plan characteristics to attract good risks and one with fixed plan characteristics; neither model contains a regulator. Medicare Advantage, a principal example of selection in the literature, is, however, subject to anti-selection regulations. Because selection causes economic inefficiency and because the historically favorable selection into Medicare Advantage plans increased government cost, the effectiveness of the anti-selection regulations is an important policy question, especially since the Medicare Advantage program has grown to comprise 30 percent of Medicare beneficiaries. Moreover, similar anti-selection regulations are being used in health insurance exchanges for those under 65. Contrary to earlier work, we show that the strengthened anti-selection regulations that Medicare introduced starting in 2004 markedly reduced government overpayment attributable to favorable selection in Medicare Advantage. At least some of the remaining selection is plausibly related to fixed plan characteristics of Traditional Medicare versus Medicare Advantage rather than changed selection strategies by Medicare Advantage plans.

Hips and hearts: the variation in incentive effects of insurance across hospital procedures

The separate identification of effects due to incentives, selection and preference heterogeneity in insurance markets is the topic of much debate. In this paper, we investigate the presence and variation in moral hazard across health care procedures. The key motivating hypothesis is the expectation of larger causal effects in the case of more discretionary procedures. The empirical approach relies on an extremely rich and extensive dataset constructed by linking survey data to administrative data for hospital medical records. Using this approach we are able to provide credible evidence of large moral hazard effects but for elective surgeries only.

How successful is Medicare Advantage?

CONTEXT

Medicare Part C, or Medicare Advantage (MA), now almost 30 years old, has generally been viewed as a policy disappointment. Enrollment has vacillated but has never come close to the penetration of managed care plans in the commercial insurance market or in Medicaid, and because of payment policy decisions and selection, the MA program is viewed as having added to cost rather than saving funds for the Medicare program. Recent changes in Medicare policy, including improved risk adjustment, however, may have changed this picture.

METHODS

This article summarizes findings from our group's work evaluating MA's recent performance and investigating payment options for improving its performance even more. We studied the behavior of both beneficiaries and plans, as well as the effects of Medicare policy.

FINDINGS

Beneficiaries make "mistakes" in their choice of MA plan options that can be explained by behavioral economics. Few beneficiaries make an active choice after they enroll in Medicare. The high prevalence of "zero-premium" plans signals inefficiency in plan design and in the market's functioning. That is, Medicare premium policies interfere with economically efficient choices. The adverse selection problem, in which healthier, lower-cost beneficiaries tend to join MA, appears much diminished. The available measures, while limited, suggest that, on average, MA plans offer care of equal or higher quality and for less cost than traditional Medicare (TM). In counties, greater MA penetration appears to improve TM's performance.

CONCLUSIONS

Medicare policies regarding lock-in provisions and risk adjustment that were adopted in the mid-2000s have mitigated the adverse selection problem previously plaguing MA. On average, MA plans appear to offer higher value than TM, and positive spillovers from MA into TM imply that reimbursement should not necessarily be neutral. Policy changes in Medicare that reform the way that beneficiaries are charged for MA plan membership are warranted to move more beneficiaries into MA.

Assessing incentives for service-level selection in private health insurance exchanges

Even with open enrollment and mandated purchase, incentives created by adverse selection may undermine the efficiency of service offerings by plans in the new health insurance Exchanges created by the Affordable Care Act. Using data on persons likely to participate in Exchanges drawn from five waves of the Medical Expenditure Panel Survey, we measure plan incentives in two ways. First, we construct predictive ratios, improving on current methods by taking into account the role of premiums in financing plans. Second, relying on an explicit model of plan profit maximization, we measure incentives based on the predictability and predictiveness of various medical diagnoses. Among the chronic diseases studied, plans have the greatest incentive to skimp on care for cancer, and mental health and substance abuse.

Despite 'welcome to Medicare' benefit, one in eight enrollees delay first use of part B services for at least two years

Much research has focused on the possible overuse of health care services within Medicare, but there is also substantial evidence of underuse. In recent years, Congress has added a "welcome to Medicare" physician visit and a number of preventive services with no cost sharing to the Medicare benefit package to encourage early and appropriate use of services. We examined national longitudinal data on first claims for Part B services-the portion of Medicare that covers physician visits-to learn how people used these benefits. We found that 12 percent of people, or about one in eight, who enrolled in Medicare at age sixty-five waited more than two years before making their first use of care covered by Part B. In part, this delay reflected patterns of use before enrollment, in that people who sought preventive care before turning sixty-five continued to do so after enrolling in Medicare. Enrollees with Medigap coverage, higher household wealth, and a higher level of education typically received care under Part B sooner than others, whereas having greater tolerance for risk was more likely to lead enrollees to delay use of Part B services. Men had a lower probability of using Part B services early than women; blacks and members of other minority groups were less likely to use services early than whites. Although the "welcome to Medicare" checkup does not appear to have had a positive effect on use of services soon after enrollment, the percentage of beneficiaries receiving Part B services in the first two years after enrollment has steadily increased over time. Whether or not delays in receipt of care should be a considerable public policy concern may depend on what factors are leading specific categories of enrollees to delay care and how such delays affect health.

Incentive and selection effects of Medigap insurance on inpatient care

The Medicare program, which provides insurance coverage to the elderly in the United States, does not protect them fully against high out-of-pocket costs. For this reason private supplementary insurance, named Medigap, has been available to cover Medicare gaps. This paper studies how Medigap affects the utilization of inpatient care, separating the incentive and selection effects of supplementary insurance. For this purpose, we use two alternative estimation methods: a standard recursive bivariate probit and a discrete multivariate finite mixture model. We find that estimated incentive effects are modest and quite similar across models. There seems to be very significant selection, with the presence of both adversely and advantageously selected individuals, stemming from the multidimensional nature of residual heterogeneity.