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.
|Place of Publication||Tilburg|
|Publisher||CentER, Center for Economic Research|
|Number of pages||37|
|Publication status||Published - 3 Nov 2015|
|Name||CentER Discussion Paper|
- health insurance
- cherry picking
- risk adjustment
- mechanism design
Bijlsma, M., Boone, J., & Zwart, G. T. J. (2015). Community Rating in Health Insurance: Trade-Off Between Coverage and Selection. (CentER Discussion Paper; Vol. 2015-053). Tilburg: CentER, Center for Economic Research.