Risk sharing and risk adjustment strategies to deal with health plan selection and efficiency

Resumen

This dissertation addresses the fundamental issue in health economics of health plan selection incentives and the tradeoff between selection and efficiency, whereby health plans try to avoid unprofitable enrollees. Previous work has shown the existence of selection, and examined the strategies for reducing it. Risk adjustment, which uses ex ante signals of cost, and risk sharing that uses ex post cost information are two strategies for reducing selection incentives. In the first chapter of this dissertation I develop a theoretical model that compares the effectiveness of four different risk adjustment and risk sharing payment systems for reducing the welfare loss due to selection. Although biased risk adjustment is superior to other risk adjustment strategies, it is not uniformly superior to risk sharing strategies that better solve the selection problems. The second chapter explores whether Medicare health maintenance organizations (HMOs) are able to influence enrollment by selectively attracting or repelling aged and disabled Medicare enrollees. We examine enrollment responses to payment rate differences at the county level, using the fact that in each county there are two different Medicare HMO payment rates: one for aged enrollees and another for disabled enrollees. HMOs either choose the recruiting effort for aged and disabled enrollees independently-and therefore, with selection-or choose the same recruiting effort for both populations-and therefore, without selection. We do not find evidence of selection of this type in the United States Medicare program from 1997 to 2000. The third chapter develops and implements a simulation model in order to test the results obtained in the first chapter of this dissertation. The simulations examine the effect of different payment policies on HMOs in the Medicare market when Fee For Service plans are fully reimbursed retrospectively. While risk sharing improves the total welfare by reducing selection and the inefficiency of services offered by the HMOs when the regulator uses low quality information, biased risk adjustment is the best strategy in reducing welfare loss per enrollee in HMO health plans when the regulator uses high quality information.