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Community Rating in Health Insurance : Trade-Off Between Coverage and Selection

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Listed:
  • Bijlsma, M.
  • Boone, Jan

    (Tilburg University, Center For Economic Research)

  • Zwart, G.T.J.

    (Tilburg University, Center For Economic Research)

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.
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Suggested Citation

  • Bijlsma, M. & Boone, Jan & Zwart, G.T.J., 2015. "Community Rating in Health Insurance : Trade-Off Between Coverage and Selection," Discussion Paper 2015-053, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:f95e5efa-523c-48e2-9ea1-fb139d006a3e
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    References listed on IDEAS

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    1. Thomas Buchmueller & John Dinardo, 2002. "Did Community Rating Induce an Adverse Selection Death Spiral? Evidence from New York, Pennsylvania, and Connecticut," American Economic Review, American Economic Association, vol. 92(1), pages 280-294, March.
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    More about this item

    Keywords

    health insurance; cherry picking; risk adjustment; mechanism design;
    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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