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Community rating in health insurance: trade-off between coverage and selection

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  • Boone, Jan
  • Zwart, Gijsbert

Abstract

We analyze the role of community rating in the optimal design of a risk adjustment scheme in competitive health insurance markets when insurers have better information on their customers' risk profiles than the sponsor of health insurance. The sponsor offers insurers a menu of risk adjustment schemes to elicit this information. The optimal scheme includes a voluntary reinsurance option. Additionally, the scheme should sometimes be complemented by a community rating requirement. The resulting inefficient coverage of low-cost types lowers the sponsor's cost of separating different insurer types. This allows the sponsor to redistribute more rents from low-cost to high-cost consumers.

Suggested Citation

  • Boone, Jan & Zwart, Gijsbert, 2015. "Community rating in health insurance: trade-off between coverage and selection," CEPR Discussion Papers 10943, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10943
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    References listed on IDEAS

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    More about this item

    Keywords

    Cherry picking; Health insurance; Mechanism design; Risk adjustment;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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