Adverse selection in health insurance markets leads to two types of inefficiency. On the demand side, adverse selection leads to plan price distortions resulting in inefficient sorting of consumers across health plans. On the supply side, adverse selection creates incentives for plans to inefficiently distort benefits to attract profitable enrollees. Reinsurance, risk adjustment, and premium categories address these problems. Building on prior research on health plan payment system evaluation, we develop measures of the efficiency consequences of price and benefit distortions under a given payment system. Our measures are based on explicit economic models of insurer behavior under adverse selection, incorporate multiple features of plan payment systems, and can be calculated prior to observing actual insurer and consumer behavior. We illustrate the use of these measures with data from a simulated market for individual health insurance.

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Keywords Adverse selection, Health insurance, Risk adjustment
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Journal Journal of Health Economics
Layton, T.J. (Timothy J.), Ellis, R.P. (Randall P.), McGuire, T.G. (Thomas G.), & van Kleef, R.C. (2017). Measuring efficiency of health plan payment systems in managed competition health insurance markets. Journal of Health Economics, 56, 237–255. doi:10.1016/j.jhealeco.2017.05.004