TY  - JOUR
AU  - Geruso, Michael
AU  - McGuire, Thomas G
TI  - Tradeoffs in the Design of Health Plan Payment Systems: Fit, Power and Balance
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 20359
PY  - 2014
Y2  - July 2014
DO  - 10.3386/w20359
UR  - http://www.nber.org/papers/w20359
L1  - http://www.nber.org/papers/w20359.pdf
N1  - Author contact info:
Michael Geruso
University of Texas at Austin
Department of Economics
1 University Station C3100
Austin, TX 78712
Tel: 512/475-8704
E-Mail: mike.geruso@austin.utexas.edu

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
AB  - In many markets, including the new U.S. Exchanges, health insurance plans are paid by risk-adjusted capitation, in some markets combined with reinsurance and other payment mechanisms. This paper proposes three metrics for analyzing the insurer incentives embedded in these complex payment systems. We discuss fit, power and balance, each of which addresses a distinct market failure in health insurance. We implement these metrics in a study of Exchange payment systems with data similar to that used to develop the Exchange risk adjustment scheme and quantify the empirical tradeoffs among the metrics. We show that an essential tradeoff arises between the goals of limiting costs and limiting cream skimming because risk adjustment, which is aimed at discouraging cream-skimming, is in fact tied to costs. We find that a simple reinsurance system scores better on fit, power and balance than the risk adjustment scheme in use in the Exchanges.
ER  -