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The conventional method for developing health care plan payment systems uses observed data to study alternative algorithms and set incentives for the health care system. In this paper, we take a different approach and transform the input data rather than the algorithm, so that the data used reflect the desired spending levels rather than the observed spending levels. We present a general economic model that incorporates the previously overlooked two-way relationship between health plan payment and insurer actions. We then demonstrate our systematic approach for data transformations in two Medicare applications: underprovision of care for individuals with chronic illnesses and health care disparities by geographic income levels. Empirically comparing our method to two other common approaches shows that the "side effects" of these approaches vary by context, and that data transformation is an effective tool for addressing misallocations in individual health insurance markets., (Copyright © 2019 Elsevier B.V. All rights reserved.)

Risk-adjustment is critical to the functioning of regulated health insurance markets. To date, estimation and evaluation of a risk-adjustment model has been based on statistical rather than economic objective functions. We develop a framework where the objective of risk-adjustment is to minimize the efficiency loss from service-level distortions due to adverse selection, and we use the framework to develop a welfare-grounded method for estimating risk-adjustment weights. We show that when the number of risk adjustor variables exceeds the number of decisions plans make about service allocations, incentives for service-level distortion can always be eliminated via a constrained least-squares regression. When the number of plan service-level allocation decisions exceeds the number of risk-adjusters, the optimal weights can be found by an OLS regression on a straightforward transformation of the data. We illustrate this method with the data used to estimate risk-adjustment payment weights in the Netherlands (N = 16.5 million)., (Copyright © 2018 Elsevier B.V. All rights reserved.)

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., (Copyright © 2017 Elsevier B.V. All rights reserved.)

Medicare beneficiaries are eligible for health insurance through the public option of traditional Medicare (TM) or may join a private Medicare Advantage (MA) plan. Both are highly subsidized but in different ways. Medicare pays for most of costs directly in TM, and subsidizes MA plans based on a "benchmark" for each beneficiary choosing a private plan. The level of this benchmark is arguably the most important policy decision Medicare makes about the MA program. Many analysts recommend equalizing Medicare's subsidy across the options - referred to in policy circles as a "level playing field." This paper studies the normative question of how to set the level of the benchmark, applying the versatile model developed by Einav and Finkelstein (EF) to Medicare. The EF framework implies unequal subsidies to counteract risk selection across plan types. We also study other reasons to tilt the field: the relative efficiency of MA vs. TM, market power of MA plans, and institutional features of the way Medicare determines subsidies and premiums. After review of the empirical and policy literature, we conclude that in areas where the MA market is competitive, the benchmark should be set below average costs in TM, but in areas characterized by imperfect competition in MA, it should be raised in order to offset output (enrollment) restrictions by plans with market power. We also recommend specific modifications of Medicare rules to make demand for MA more price elastic., (Copyright © 2016. Published by Elsevier B.V.)

In many markets, including the new U.S. Marketplaces, health insurance plans are paid by risk-adjusted capitation, sometimes combined with reinsurance and other payment mechanisms. This paper proposes a framework for evaluating the de facto insurer incentives embedded in these complex payment systems. We discuss fit, power and balance, each of which addresses a distinct market failure in health insurance. We implement empirical metrics of fit, power, and balance in a study of Marketplace payment systems. Using data similar to that used to develop the Marketplace risk adjustment scheme, we quantify tradeoffs among the three classes of incentives. We show that an essential tradeoff arises between the goals of limiting costs and limiting cream skimming because risk adjustment, which is aimed at discouraging cream-skimming, weakens cost control incentives in practice. A simple reinsurance system scores better on our measures of fit, power and balance than the risk adjustment scheme in use in the Marketplaces., (Copyright © 2016 Elsevier B.V. All rights reserved.)

Even with open enrollment and mandated purchase, incentives created by adverse selection may undermine the efficiency of service offerings by plans in the new health insurance Exchanges created by the Affordable Care Act. Using data on persons likely to participate in Exchanges drawn from five waves of the Medical Expenditure Panel Survey, we measure plan incentives in two ways. First, we construct predictive ratios, improving on current methods by taking into account the role of premiums in financing plans. Second, relying on an explicit model of plan profit maximization, we measure incentives based on the predictability and predictiveness of various medical diagnoses. Among the chronic diseases studied, plans have the greatest incentive to skimp on care for cancer, and mental health and substance abuse., (Copyright © 2014 Elsevier B.V. All rights reserved.)

In two important health policy contexts - private plans in Medicare and the new state-run "Exchanges" created as part of the Affordable Care Act (ACA) - plan payments come from two sources: risk-adjusted payments from a Regulator and premiums charged to individual enrollees. This paper derives principles for integrating risk-adjusted payments and premium policy in individual health insurance markets based on fitting total plan payments to health plan costs per person as closely as possible. A least squares regression including both health status and variables used in premiums reveals the weights a Regulator should put on risk adjusters when markets determine premiums. We apply the methods to an Exchange-eligible population drawn from the Medical Expenditure Panel Survey (MEPS)., (Copyright © 2013 Elsevier B.V. All rights reserved.)

This paper studies the role of Medicare's premium policy in sorting beneficiaries between traditional Medicare (TM) and managed care plans in the Medicare advantage (MA) program. Beneficiaries vary in their demand for care. TM fully accommodates demand but creates a moral hazard inefficiency. MA rations care but disregards some elements of the demand. We describe an efficient assignment of beneficiaries to these two options, and argue that efficiency requires an MA program oriented to serve the large middle part of the distribution of demand: the "middle class." Current Medicare policy of a "single premium" for MA plans cannot achieve efficient sorting. We characterize the demand-based premium policy that can implement the efficient assignment of enrollees to plans. If only a single premium is feasible, the second-best policy involves too many of the low-demand individuals in MA and a too low level of services relative to the first best. We identify approaches to using premium policy to revitalize MA and improve the efficiency of Medicare., (Copyright © 2012 Elsevier B.V. All rights reserved.)

New regulation of health insurance markets creates multiple levels of health plans, with designations like "Gold" and "Silver." The underlying rationale for the heavy-metal approach to insurance regulation is that heterogeneity in demand for health care is not only due to health status (sick demand more than the healthy) but also to other, "taste" related factors (rich demand more than the poor). This paper models managed competition with demand heterogeneity to consider plan payment and enrollee premium policies in relation to efficiency (net consumer benefit) and fairness (the European concept of "solidarity"). Specifically, this paper studies how to implement a "Silver" and "Gold" health plan efficiently and fairly in a managed competition context. We show that there are sharp tradeoffs between efficiency and fairness. When health plans cannot or may not (because of regulation) base premiums on any factors affecting demand, enrollees do not choose the efficient plan. When taste (e.g., income) can be used as a basis of payment, a simple tax can achieve both efficiency and fairness. When only health status (and not taste) can be used as a basis of payment, health status-based taxes and subsidies are required and efficiency can only be achieved with a modified version of fairness we refer to as "weak solidarity." An overriding conclusion is that the regulation of premiums for both the basic and the higher level plans is necessary for efficiency., (Copyright © 2011 Elsevier B.V. All rights reserved.)

In 1998, Medicare adopted a per diem Prospective Payment System (PPS) for skilled nursing facility care, which was intended to deter the use of high-cost rehabilitative services. The average per diem decreased under the PPS, but because per diems increased for greater therapy minutes, the ability of the PPS to deter the use of high-intensity services was questionable. In this study, we assess how the PPS affected the volume and intensity of Medicare services. By volume we mean the product of the number of Medicare residents in a facility and the average length-of-stay, by intensity we mean the time per week devoted to rehabilitation therapy. Our results indicate that the number of Medicare residents decreased under PPS, but rehabilitative services and therapy minutes increased while length-of-stay remained relatively constant. Not surprisingly, when subsequent Medicare policy changes increased payment rates, Medicare volume far surpassed the levels seen in the pre-PPS period., (Copyright © 2011 Elsevier B.V. All rights reserved.)

Improving patient compliance with physicians' treatment or prescription recommendations is an important goal in medical practice. We examine the relationship between treatment progress and patient compliance. We hypothesize that patients balance expected benefits and costs during a treatment episode when deciding on compliance; a patient is more likely to comply if doing so results in an expected gain in health benefit. We use a unique data set of outpatient alcohol abuse treatment to identify a relationship between treatment progress and compliance. Treatment progress is measured by the clinician's comments after each attended visit. Compliance is measured by a client attending a scheduled appointment, and continuing with treatment. We find that a patient who is making progress is less likely to drop out of treatment. We find no evidence that treatment progress raises the likelihood of a patient attending the next scheduled visit. Our results are robust to unobserved patient heterogeneity., (Copyright 2009 Elsevier B.V. All rights reserved.)

Global ratings, such as those based on consumer satisfaction, are a commonly used form of report on the performance of health plans and providers. A simple averaging of the global rating by plan members leads to a problem: it gives a plan greater incentives to improve services used by low-cost members than services used by high-cost members. This paper presents a formal model of consumer formation of global ratings and the incentives these rating convey to plans. We use this model to characterize weights on consumer respondents to correct the incentive problem. We implement our proposed solution using data from the Consumer Assessments of Health Care Providers and Systems (CAHPS) and the Medicare Current Beneficiary Survey (MCBS). Our correction is low-cost, easily implemented on an on-going basis, and insensitive to assumptions about why health plans care about quality ratings.

In designing a quality report, a health plan needs to account for the report's effect on the doctor, hospital or other provider. This paper proposes a simple model of how quality reporting affects a health care provider, using the example of a doctor subject to reporting with a "cut point" that designates the doctor as above or below some standard. Choice of cut point affects the doctor's welfare through the doctor's preferences about income and by affecting market demand for the doctor's services. These factors lead doctors to be "report-averse" or "report-loving," a determination that affects a health plan's cost to enlist a doctor in a contract with reporting and that guides choice of a cut point to maximize the doctors' effort to improve her quality.

This paper re-examines the relation between the predictability of health care spending and incentives due to adverse selection. Within an explicit model of health plan decisions about service levels, we show that predictability (how well spending on certain services can be anticipated), predictiveness (how well the predicted levels of certain services contemporaneously co-vary with total health care spending), and demand responsiveness all matter for adverse selection incentives. The product of terms involving these three measures of predictability, predictiveness, and demand responsiveness define an empirical index of the direction and magnitude of selection incentives. We quantify the relative magnitude of adverse selection incentives bearing on various types of health care services in Medicare. Our results are consistent with other research on service-level selection. The index of incentives can readily be applied to data from other payers.

This paper investigates whether managed care ameliorates or aggravates ethnic and racial health care disparities in Medicare. First, we analyze the choice of type of insurance made by Medicare enrollees to see if minorities are more likely to choose the managed care alternative. Second, we study the differential effect of managed care on disparities using several measures of access, use and cost of services. Both analyses are conducted on two independent data sets, the Medicare Current Beneficiary Survey and the National Health Interview Survey. We conclude that relative to Whites, minorities are at least as well off -- in terms of benefits and costs -- in Medicare managed care as in Medicare traditional indemnity plans.

Quality reports about health plans and providers are becoming more prevalent in health care markets. This paper casts the decision about what information to report to consumers about health plans as a policy decision. In a market with adverse selection, complete information about quality leads to inefficient outcomes. In a Rothschild-Stiglitz model, we show that averaging quality information into a summary report can enforce pooling in health insurance, and by choice of the right weights in the averaged report, a payer or regulator can induce first-best quality choices. The optimal quality report is as powerful as optimal risk adjustment in correcting adverse selection inefficiencies.

This paper considers three types of provider-client interactions that influence quantity of health care use: rationing, effort, and persuasion. By rationing, we refer to a quantity limit set by a provider; effort, the productive inputs supplied by a provider to increase a client's demand; persuasion, the unproductive inputs used by a provider to induce a client's demand. We construct a theoretical model incorporating all three mechanisms as special cases. When the general model is specialized into one of three mechanisms, a set of empirical implications emerges. We test for the presence of each mechanism using data of patients receiving outpatient treatment for alcohol abuse in the Maine Addiction Treatment System. We find evidence for rationing and persuasion, but not effort.

In the federal Medicare program, contracting health maintenance organizations (HMOs) are paid on a capitated basis. There has long been concern that an "adverse selection" of risks remain in the traditional fee-for-service (FFS) sector, since beneficiaries with low costs may leave the FFS sector and join the HMOs. The distortion associated with this form of selection is that health plans may design their mix of health care services in order to effectuate favorable selection. This paper scrutinizes patterns of HMO membership and costs by service in the FFS sector for evidence consistent with the hypothesis that HMOs engage in service-level product distortion. We develop a multi-service model of choice between FFS and HMOs and show that if the HMO sector is underproviding (overproviding) a service relative to the FFS sector, we should observe a positive (negative) correlation between the HMO market share and average costs of those remaining in the FFS sector. We estimate the correlation between the HMO market share and the average FFS costs for different health care services using Medicare data for 1996. We find evidence indicating that there exists significant service-level selection by HMOs.

Disparities in health can result from the clinical encounter between a doctor and a patient. This paper studies three possible mechanisms: prejudice of doctors in the form of being less willing to interact with members of minority groups, clinical uncertainty associated with doctors' differential interpretation of symptoms from minority patients or from doctor's distinct priors across races, and stereotypes doctors hold about health-related behavior of minority patients. Within a unified conceptual framework, we show how all three can lead to disparities in health and health services use. We also show that the effect of social policy depends critically on the underlying cause of disparities.

Managed health care plans and providers in the US and elsewhere sell their services to multiple payers. For example, the three largest groups of purchasers from health plans in the US are employers, Medicaid plans, and Medicare, with the first two accounting for over 90% of the total enrollees. In the case of hospitals, Medicare is the largest buyer, but it alone only accounts for 40% of the total payments. While payers have different objectives and use different contracting practices, the plans and providers set some elements of the quality in common for all payers. In this paper, we study the interactions between a public payer, modeled on Medicare, which sets a price and takes any willing provider, a private payer, which limits providers and pays a price on the basis of quality, and a provider/plan, in the presence of shared elements of quality. The provider compromises in response to divergent incentives from payers. The private sector dilutes Medicare payment initiatives, and may, under some circumstances, repair Medicare payment policy mistakes. If Medicare behaves strategically in the presence of private payers, it can free-ride on the private payer and set its prices too low. Our paper has many testable implications, including a new hypothesis for why Medicare has failed to gain acceptance of health plans in the US.