Reinsurance can complement risk adjustment of health plan payments to improve fit of payments to plan spending at the individual and group level. This paper proposes three improvements in health plan payment systems using reinsurance. First, we base reinsurance payments on spending not accounted for by the risk adjustment system, rather than just high spending. Second, we propose pairing reinsurance for individual-level losses with repayments for individual-level profits. Third, we optimize the weights on the risk adjustors taking account of the presence of reinsurance/repayment. We implement our methodology in data from Germany, the Netherlands and the US Marketplaces, comparing our modified approach to plan payment with risk adjustment as currently practiced in the three settings. The combination of the three improvements yields very substantial improvements in the individual-level fit of payments to plan spending in all three countries.

Additional Metadata
Keywords health insurance, risk adjustment, reinsurance
JEL Analysis of Health Care Markets (jel I11), Health Insurance, Public and Private (jel I13)
Persistent URL dx.doi.org/10.1086/706796, hdl.handle.net/1765/124314
Journal American Journal of Health Economics
Citation
van Kleef, R.C, McGuire, T.G., & Schillo, S. (2020). Reinsurance, Repayments, and Risk Adjustment in Individual Health Insurance: Germany, The Netherlands and the U.S. Marketplaces. American Journal of Health Economics. doi:10.1086/706796