Measuring Selection Incentives in Managed Care: Evidence from the Massachusetts State Employee Insurance Program

Health economists and policymakers have long recognized that capitation gives insurers incentive to manipulate their offerings to deter the sick and attract the healthy. The shadow-price ap- proach to measuring such selection incentives was pioneered by Frank, Glazer and McGuire (2000). We extend their model to allow for partial capitation and nonfinancial concerns of insurers. We calculate three kinds of selection metrics using managed care medical and pharmacy spending data for fiscal years 2001 and 2002 from the Massachusetts state employee insurance program. Financial returns to risk selection are high, as indicated by all three selection indices as well as by the direct profits an insurer could earn if it could exclude unprofitable patients. Empirically, the financial temptation to distort service quality increases non- linearly with supply-side cost sharing. The more an insurer di- rectly values quality or patient benefit relative to profit, the less severe risk selection incentives become.