TY - JOUR AU - Glazer, Jacob AU - McGuire, Thomas AU - Shi, Julie TI - Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection JF - National Bureau of Economic Research Working Paper Series VL - No. 19998 PY - 2014 Y2 - March 2014 DO - 10.3386/w19998 UR - http://www.nber.org/papers/w19998 L1 - http://www.nber.org/papers/w19998.pdf N1 - Author contact info: Jacob Glazer Department of Economics Warwick University and Faculty of Management Tel Aviv University Tel: 617-353-6323 Fax: 617-353-4449 E-Mail: glazer@post.tau.ac.il Thomas McGuire Department of Health Care Policy Harvard Medical School 180 Longwood Avenue Boston, MA 02115 Tel: 617/432-3536 E-Mail: mcguire@hcp.med.harvard.edu Julie Shi School ofEconomics Peking University E-Mail: jshi@pku.edu.cn M1 - published as Jacob Glazer, Thomas G. McGuire, Julie Shi. "Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection," in Ana Aizcorbe, Colin Baker, Ernst R. Berndt, and David M. Cutler, editors, "Measuring and Modeling Health Care Costs" University of Chicago Press (2018) M3 - presented at "Measuring and Modeling Health Care Costs", October 18-19, 2013 AB - This paper develops and implements a statistical methodology to account for the equilibrium effects (aka adverse selection) in design of risk adjustment formula in health insurance markets. Our setting is modeled on the situation in Medicare and the new state Exchanges where individuals sort themselves between a discrete set of plan types (here, two). Our "Silver" and "Gold" plans have fixed characteristics, as in the well-known research on selection and efficiency by Einav and Finkelstein (EF). We build on the EF model in several respects, including by showing that risk adjustment can be used to achieve the premiums that will lead to efficient sorting. The target risk adjustment weights can be found by use of constrained regressions, where the constraints in the estimation are conditions on premiums that should be satisfied in equilibrium. We illustrate implementation of the method with data from seven years of the Medical Expenditure Panel Survey. ER -