title: Tradeoffs in the design of health plan payment systems: Fit, power and balance.
abstract: In many markets, including the new U.S. Marketplaces, health insurance plans are paid by risk-adjusted capitation, sometimes combined with reinsurance and other payment mechanisms. This paper proposes a framework for evaluating the de facto insurer incentives embedded in these complex payment systems. We discuss fit, power and balance, each of which addresses a distinct market failure in health insurance. We implement empirical metrics of fit, power, and balance in a study of Marketplace payment systems. Using data similar to that used to develop the Marketplace risk adjustment scheme, we quantify tradeoffs among the three classes of incentives. We show that an essential tradeoff arises between the goals of limiting costs and limiting cream skimming because risk adjustment, which is aimed at discouraging cream-skimming, weakens cost control incentives in practice. A simple reinsurance system scores better on our measures of fit, power and balance than the risk adjustment scheme in use in the Marketplaces.
authors.affiliation: Department of Economics, University of Texas at Austin, United States; National Bureau of Economic Research (NBER), United States. Electronic address: mike.geruso@gmail.com.
authors.forename: Michael
authors.initials: M
authors.lastname: Geruso
authors.affiliation: National Bureau of Economic Research (NBER), United States; Department of Health Care Policy, Harvard Medical School, United States.
authors.forename: Thomas G
authors.initials: TG
authors.lastname: McGuire
mesh_terms: D002204:Capitation Fee; D015273:Insurance Selection Bias; D007348:Insurance, Health; D012051:Reimbursement Mechanisms / Q000458:organization & administration*; D020379:Risk Adjustment; D014481:United States
keywords: Adverse selection; Capitation; Health insurance; Reinsurance; Risk adjustment