J Health Econ. 2015 Jul;42:81-9. doi: 10.1016/j.jhealeco.2014.12.003. Epub 2014 Dec 17.

The interaction of direct and indirect risk selection.

Journal of health economics

Normann Lorenz

PMID: 25935738 DOI: 10.1016/j.jhealeco.2014.12.003

Abstract

This paper analyzes the interaction of direct and indirect risk selection in health insurance markets. It is shown that direct risk selection - using measures unrelated to the benefit package like selective advertising or 'losing' applications of high risk individuals - nevertheless has an influence on the distortions of the benefit package caused by indirect risk selection. Direct risk selection (DRS) may either increase or decrease these distortions, depending on the type of equilibrium (pooling or separating), the type of DRS (positive or negative) and the type of cost for DRS (individual-specific or not). Regulators who succeed in reducing DRS by, e.g., banning excessive advertising or implementing fines for 'losing' applications, may therefore (unintendedly) mitigate or exacerbate the distortions of the benefit package caused by indirect risk selection. It is shown that the interaction of direct and indirect risk selection also alters the formula for optimal risk adjustment.

Copyright © 2014 Elsevier B.V. All rights reserved.

Keywords: Discrete choice; Health insurance; Imperfect competition; Risk adjustment; Risk selection

MeSH terms

• Insurance, Health*
• Risk Adjustment / methods
• Risk Adjustment / statistics & numerical data

Publication Types

• Journal Article