No full-text available
To read the full-text of this research,
you can request a copy directly from the author.
Exclusive Contract in Health Insurance
Abstract
Competition between insurance companies for employees of a firm often increases the prices and reduces the availability of high-quality health plans offered to employees. An insurance company can reduce competition by signing an exclusive contract, which guarantees that the company is the only insurance provider. The study assesses whether exclusive contracts can alleviate the negative consequences of competition. Using the nation-wide survey of employers, I find that exclusive insurers charged 39-42% less for a unit of insurance quality than non-exclusive insurers. Furthermore, I find that the pattern of insurance quality dispersion is consistent with the exclusive insurers offering more high quality plans.
ResearchGate has not been able to resolve any citations for this publication.
This paper reviews the movement among multiple health plan options between 1994 and 1998 for Minnesota state employees whose work site was located in the Minneapolis/St. Paul metropolitan area. During this period the employer contribution was based on the lowest family premium bid from a qualified plan in the county of the employee’s work site. In 1995 the largest individual practice association model HMO in the state, Medica, reduced its state premium by 25%, becoming the lowest-priced option. This resulted in massive transfers of enrollees between plans. The point of this study was to estimate the risk changes that resulted from these movements between plan options. We obtained enrollment data by age and gender from Blue Cross Blue Shield of Minnesota (Blue Cross) and applied age/gender risk weight factors derived from actuarial rate tables to the Blue Cross cells. Annual changes in risk weights by 10-20% were common in a number of Blue Cross subpopulations, and in one case, by more than 50%.
Important questions about health care are often addressed by studying health care utilization. Utilization data have several characteristics that make them a challenge to analyze. In this paper we discuss sources of information, the statistical properties of utilization data, common analytic methods including the two-part model, and some newly available statistical methods including the generalized linear model. We also address issues of study design and new methods for dealing with censored data. Examples are presented.
Health insurance is a complex, multi-attribute product and this creates search frictions that can distort market outcomes. We study the effect of frictions in the market for employer based health insurance. We find that frictions are most severe in the "fully insured" part of the group health insurance market and we estimate that frictions in this market segment cause a quarter of the consumer surplus to shift from policy-holders to insurers (a transfer of 32.5 billion dollars in 1997). Our analysis also suggests that frictions in insurance markets also reduce incentives to invest in future health.
Reimbursement incentives influence both the intensity of services and who is treated when patients differ in severity of illness. The social optimum is compared to the private Cournot-Nash solution for three provider strategies: creaming--over-provision of services to low severity patients; skimping--under-provision of services to high severity patients; and dumping--the explicit avoidance of high severity patients. Cost-based reimbursement results in overprovision of services (creaming) to all types of patients. Prospectively paid providers cream low severity patients and skimp high severity ones. If there is dumping of high severity patients, then there will also be skimping.
Adverse selection is perceived to be a major source of market failure in insurance markets. There is little empirical evidence on the extent of the problem. We estimate a structural model of health insurance and health care choices using data on single individuals from the NMES. A robust prediction of adverse-selection models is that riskier types buy more coverage and, on average, end up using more care. We test for unobservables linking health insurance status and health care consumption. We find no evidence of informational asymmetries.
Typically, health insurance premiums depend at least in part on the previous costs of the insuring firm, a factor termed 'experience rating'. This link between health status and future premiums raises concerns of market failure, since it limits the ability of firms to insure the price at which they can purchase insurance in future years. This paper examines the economic factors influencing experience rating. The first part of the paper demonstrates that experience rating is quantitatively important. Premiums at the 90th percentile of the distribution are 2 1/2 times greater than premiums at the 10th percentile of the distribution, and this difference does not appear to be due to the generosity of benefits or the demographic composition of the firm. The second part of the paper then discusses explanations for the prevalence of community rating, including inability to write long-term contracts, lack of demand from firms with below average costs, and public policies that provide subsidies to the uninsured. The last part of the paper examines these predictions empirically. I find evidence that firms with high-wage employees and low turnover have less premium variability than firms with low-wage employees or high turnover, but no evidence that public policies affect premium variability.
Premiums in health insurance markets frequently do not reflect individual differences in costs, either because consumers have private information or because prices are not risk rated. This creates inefficiencies when consumers self-select into plans. We develop a simple econometric model to study this problem and estimate it using data on small employers. We find a welfare loss of 2-11 percent of coverage costs compared to what is feasible with risk rating. Only about
one-quarter of this is due to inefficiently chosen uniform contribution levels. We also investigate the reclassification risk created by risk rating individual incremental premiums, finding only a modest welfare cost.
Despite many approaches of neoclassical and endogenous growth theory, economists still face problems in explaining the reasons for income differences between countries. Institutional economics and the deep determinants of growth literature try to depart from pure economic facts to examine economic development. Therefore, this article analyzes the impact of institutions, geography, and integration on per capita income. Concerning theoretical reasoning, emphasis is on the emergence of institutions and their effect on economic growth. However, institutions can appear in different shapes since political, legal, and economic restrictions are not the only constraints on human behaviour. Norms and values also limit possible actions. Therefore, a differentiation between formal and informal institutions is made. Informal institutions are defined as beliefs, attitudes, moral, conventions, and codes of conduct. Property rights are assumed to be the basic formal institutional feature for economic success. Despite their direct impact on growth through individual utility maximization, property rights also make a statement concerning the political and legal environment of a country. Regarding the regression analysis, different religious affiliations are used as instrumental variables for formal and informal institutions. The regression results affirm a crucial role of informal and formal institutions concerning economic development. However, a high proportion of Protestant citizens encourage informal institutions that support economic growth, while a high Muslim proportion of the population is negatively correlated with growth-supporting formal institutions. --
This article reviews the basic theoretical model of risk adjustment (Glazer/McGuire 2000) with a special focus on a coherent presentation of the main results. With adverse selection a regulator pursuing efficiency and solidarity objectives will need a risk adjustment scheme acting on a signal to accomplish both aims. With an imperfect signal this result will not hold. The regulator can react by trying to find more informative signals or by changing the calculation of the risk adjustment scheme (optimal risk adjustment). The model is then extended to derive results on the associated incentives regarding economic efficiency, manipulation of signals and innovation. The incentives will hold with perfect signals but may be violated in the imperfect signal setting. Optimal risk adjustment will most likely have a negative effect on these incentives. The results are contrasted with the empirical literature on the risk adjustment procedure in Germany which is centred on risk selection, the choice of risk adjustors and incentive effects. The paper concludes with an outlook on the ongoing reform of the German risk adjustment procedure.
We assess the welfare impact of adverse selection in health insurance choices using detailed panel data on health plan choices and complete health care utilization. Our estimates suggest that adverse selection plays an important role in explaining cost differentials across plans and much of the selection occurs along difficult to contract upon dimensions. Interestingly, the distortionary consequences of the asymmetric information are very modest because individuals are very premium inelastic in our data. Our findings show that the presence of significant adverse selection need not cause meaningful welfare loss.
The smearing estimate is proposed as a nonparametric estimate of the expected response on the untransformed scale after fitting a linear regression model on a transformed scale. The estimate is consistent under mild regularity conditions, and usually attains high efficiency relative to parametric estimates. It can be viewed as a low-premium insurance policy against departures from parametric distributional assumptions. A real-world example of predicting medical expenditures shows that the smearing estimate can outperform parametric estimates even when the parametric assumption is nearly satisfied.
This paper investigates consumer switching costs in the context of health insurance markets, where adverse selection is a potential concern. Though previous work has studied these phenomena in isolation, they interact in a way that directly impacts market outcomes and consumer welfare. Our identification strategy leverages a unique natural experiment that occurred at a large firm where we also observe individual-level panel data on health insurance choices and medical claims. We present descriptive results to show that (i) switching costs are large and (ii) adverse selection is present. To formalize this analysis we develop and estimate a choice model that jointly quantifies switching costs, risk preferences, and ex ante health risk. We use these estimates to study the welfare impact of an information provision policy that nudges consumers toward better decisions by reducing switching costs. This policy increases welfare in a naive setting where insurance plan prices are held fixed. However, when insurance prices change endogenously to reflect updated enrollee risk pools, the same policy substantially exacerbates adverse selection and reduces consumer welfare, doubling the existing welfare loss from adverse selection.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
The paper examines the nature of health insurance contracts when insurance companies pool high- and low-risk individuals. In a spatial product differentiation model, the normal forces of competition induce quality provision, but selection incentives induce insurers to under-provide quality. To offset selection incentives, the government can reimburse some of the insurers’ costs. However, such a subsidy can in some cases reduce quality further, as well as discourage production efficiency. In such cases the optimal reimbursement rate is negative.
We provide a graphical illustration of how standard consumer and producer theory can be used to quantify the welfare loss
associated with inefficient pricing in insurance markets with selection. We then show how this welfare loss can be estimated
empirically using identifying variation in the price of insurance. Such variation, together with quantity data, allows us
to estimate the demand for insurance. The same variation, together with cost data, allows us to estimate how insurers' costs
vary as market participants endogenously respond to price. The slope of this estimated cost curve provides a direct test for
both the existence and the nature of selection, and the combination of demand and cost curves can be used to estimate welfare.We
illustrate our approach by applying it to data on employer-provided health insurance from one specific company. We detect
adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular
application are small, in both absolute and relative terms.
Using a unique panel dataset of health plan choices and personal characteristics of employees at a single firm, this paper provides estimates of price elasticities for health insurance plans in a managed competition setting. Estimated price elasticities are larger in absolute value than most previous estimates and the magnitude of the price elasticity suggests that there is a place for price competition in this market. We also find evidence of transition costs in switching health plans for older and less healthy employees. Such differential responses to price may contribute to adverse selection in this market.
Employers may offer employees a choice of health plans either to promote competition among plans or to better cater to employee preferences for different types of products. This article examines whether the relationship between the availability of choice and insurance costs and coverage are consistent with these models of employer behavior. The results indicate that employers who offer choice have lower average premiums, primarily because employees are enrolled in less generous plans, and cover a greater proportion of workers than those who do not. The results are consistent with employers offering choice to accommodate diverse worker preferences. Copyright (c) The Journal of Risk and Insurance, 2010.
We use data on health plan choices by employees of Harvard University to compare the benefits of insurance competition with
the costs of adverse selection. Moving to a voucher-type system induced significant adverse selection, with a welfare loss
of 2 to 4 percent of baseline spending. But increased competition reduced Harvard's premiums by 5 to 8 percent. The premium
reductions came from insurer profits, so while Harvard was better off, the net effect for society was only the adverse selection
loss. Adverse selection can be minimized by adjusting voucher amounts for individual risk. We discuss how such a system would
work.
We consider the effect of a renegotiable exclusive contract restricting a buyer to purchase from only one seller on the levels of noncontractible investments undertaken in their relationship. Contrary to some informal claims in the literature, we find that exclusivity has no effect when all investments are fully specific to the relationship (i.e., are purely "internal"). Exclusivity does matter when investments affect the value of the buyer's trade with other sellers (i.e., have "external" effects). We examine the effects of exclusivity on investments and aggregate welfare, and the private incentives of the buyer-seller coalition to use it.
This study investigates the effect of group health insurance plan choice on insurance unit price. The empirical findings suggest that the unit price of insurance, as measured by the ratio of the premium to expected indemnity benefits, is lower in group plans that offer employees a choice of different insurance options and require a premium contribution than it is in plans lacking at least one of these two features. The analyses suggest that lower unit prices are related to an increase in indemnity benefits and that the reduction in the unit price is greater for lower risks. The findings indicate that although subsidization of high risks by low risks occurs with group health insurance, the degree of subsidization is less when employees are offered a choice of health insurance plans. Copyright The Journal of Risk and Insurance.
Since risk-taking, private health insurance plans were introduced into Medicare twenty-five years ago, policymakers have disagreed on these plans' fundamental purposes. Articulated objectives, which include improving quality, reducing government spending, providing additional benefits (without expanding the entitlement), increasing choices for beneficiaries, and providing benchmark competition for traditional Medicare, are plausible but sometimes conflicting. The program's history demonstrates continuous shifts in emphasis on these objectives. We enumerate the differing advantages of public and private plans in Medicare and argue that policymakers should focus their efforts on leveling the public-private playing field, thereby dealing forthrightly with the reality of growing fiscal problems.
A recent policy change by the University of California (UC) provides a unique natural experiment for investigating the sensitivity of consumers to health plan premiums. When the UC moved to a policy of limiting its contribution to the cost of the least expensive plan, out-of-pocket premiums increased for roughly one-third of UC employees. We examine the extent to which UC employees switched plans in response to this change in premiums. Our results indicate a strong response. Individuals facing premium increases of less than $10 were roughly 5 times as likely to switch plans as those whose premiums remained constant.
Health plans paid by capitation have an incentive to distort the quality of services they offer to attract profitable and to deter unprofitable enrollees. We characterize plans' rationing as a "shadow price" on access to various areas of care and show how the profit maximizing shadow price depends on the dispersion in health costs, individuals' forecasts of their health costs, the correlation between use in different illness categories, and the risk adjustment system used for payment. These factors are combined in an empirically implementable index that can be used to identify the services that will be most distorted by selection incentives.
We investigate the extent to which sensitivity to health plan premiums differs across individuals according to characteristics related to the cost of switching plans. Our results indicate substantial variation in price sensitivity related to expected health care costs: younger, healthier employees are between two and four times more sensitive to price than employees who are older and who have been recently hospitalized or diagnosed with cancer. We also find evidence of status quo bias: estimated premium elasticities are significantly higher for new hires than for incumbent employees. Simulations combining our results with actuarial data illustrate the cost implications of risk-related differences in price elasticity.
Although most private health insurance in US is employment-based, little is known about how employers choose health plans for their employees. In this paper, I examine the relationship between employee preferences for health insurance and the health plans offered by employers. I find evidence that employee characteristics affect the generosity of the health plans offered by employers and the likelihood that employers offer a choice of plans. Although the results suggest that employers do respond to employee preferences in choosing health benefits, the effects of worker characteristics on plan offerings are quantitatively small.
We derive a two-stage model in which health plans first compete to be selected by employers and subsequently compete to be chosen by employees. We identify the key determinants of competition and show that increasing competition at one stage often comes at the expense of competition at the other stage. Many economists and policymakers have argued that in order to increase competition among health plans, employers should offer multiple plans and structure premium contributions to make employees more price sensitive. While our theoretical model shows that following this policy prescription may not actually lead to lower premiums, our empirical analysis provides some support for this recommendation. We also find that if employers instead pay the full premium, premiums increase when they offer additional plans. These results have important implications for both employers and policymakers.
Reform proposals of health care systems in several countries have advocated variations of a risk adjustment/capitation system. These proposals face a serious objection: incentives to risk selection are prevalent in the system. By now, considerable literature has been devoted to finding ways of mitigating, if not eliminating, this problem, while at the same time preserving incentives to efficiency. We contribute to this debate presenting a transfer system that, under some circumstances, attains both provider efficiency and no risk selection. The transfer system extends typical linear payment systems. It can be interpreted as a fixed transfer in the beginning of the period plus an ex-post fund at the end of the period. The novelty rests in the way contributions to this fund are defined.
Paying for health insurance: The trade-off betwen compe-tition and adverse selection The demand for deductibles in private health insurance : A probit model with sample selection
- D Cutler
- S Reber
Cutler, D. and Reber, S. (1998). Paying for health insurance: The trade-off betwen compe-tition and adverse selection. Quarterly Journal of Economics, 113(2):433–466. de Ven, W. P. M. M. V. and Praag, B. M. S. V. (1981). The demand for deductibles in private health insurance : A probit model with sample selection. Journal of Econometrics, 17(2):229 – 252