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

M. Bijlsma, Jan Boone, G.T.J. Zwart

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages37
Volume2015-022
Publication statusPublished - 3 Nov 2015

Publication series

NameTILEC Discussion Paper
Volume2015-022

Keywords

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

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    Bijlsma, M., Boone, J., & Zwart, G. T. J. (2015). Community Rating in Health Insurance: Trade-Off Between Coverage and Selection. (TILEC Discussion Paper; Vol. 2015-022). TILEC.