How Much Favorable Selection Is Left in Medicare Advantage?

Joseph P. Newhouse, Mary Price, J. Michael McWilliams, John Hsu, Thomas McGuire

NBER Working Paper No. 20021
Issued in March 2014
NBER Program(s):Health Care

There are two types of selection models in the health economics literature. One focuses on choice between a fixed set of contracts. Consumers with greater demand for medical care services prefer contracts with more generous reimbursement, resulting in a suboptimal proportion of consumers in such contracts in equilibrium. In extreme cases more generous contracts may disappear (the "death spiral"). In the other model insurers tailor the contracts they offer consumers to attract profitable consumers. An equilibrium may or may not exist in such models, but if it exists it is not first best.

The Medicare Advantage program offers an opportunity to study these models empirically, although unlike the models in the economics literature there is a regulator with various tools to address selection. One such tool is risk adjustment, or making budget neutral transfers among insurers using observable characteristics of enrollees that predict spending. Medicare drastically changed its risk adjustment program starting in 2004 and made a number of other changes to reduce selection as well. Previous work has argued that the changes worsened selection. We show, using a much larger data set, that this was not the case, but that some inherent selection may remain.

download in pdf format
   (360 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20021

Published: Joseph P. Newhouse & Mary Price & John Hsu & J. Michael McWilliams & Thomas G. McGuire, 2015. "How Much Favorable Selection Is Left in Medicare Advantage?," American Journal of Health Economics, MIT Press, vol. 1(1), pages 1-26, Winter. citation courtesy of

Users who downloaded this paper also downloaded* these:
Besley and Rosen w6667 Sales Taxes and Prices: An Empirical Analysis
Duggan, Starc, and Vabson w19989 Who Benefits when the Government Pays More? Pass-Through in the Medicare Advantage Program
Barcellos and Jacobson w19954 The Effects of Medicare on Medical Expenditure Risk and Financial Strain
Abaluck, Agha, Kabrhel, Raja, and Venkatesh w19956 Negative Tests and the Efficiency of Medical Care: What Determines Heterogeneity in Imaging Behavior?
Chandra, Finkelstein, Sacarny, and Syverson w19200 Healthcare Exceptionalism? Productivity and Allocation in the U.S. Healthcare Sector
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us