NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tradeoffs in the Design of Health Plan Payment Systems: Fit, Power and Balance

Michael Geruso, Thomas G. McGuire

NBER Working Paper No. 20359
Issued in July 2014
NBER Program(s):   AG   HC   PE

In many markets, including the new U.S. Exchanges, health plans are paid by risk-adjusted capitation, in some markets combined with reinsurance and other payment features. This paper proposes three metrics for grading these complex payment systems: 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 describe the tradeoffs among the metrics. We find that a simple reinsurance system scores better on fit, power and balance than the risk adjustment formula in use in the Exchanges.

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Document Object Identifier (DOI): 10.3386/w20359

 
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