Community Rating in Health Insurance: Trade-Off between Coverage and Selection

38 Pages Posted: 27 Nov 2015

See all articles by Michiel Bijlsma

Michiel Bijlsma

De Nederlandsche Bank; Tilburg Law and Economics Center (TILEC)

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

Gijsbert Zwart

University of Groningen

Date Written: November 2015

Abstract

We analyze the role of community rating in the optimal design of a risk adjustment scheme in competitive health insurance markets when insurers have better information on their customers' risk profiles than the sponsor of health insurance. The sponsor offers insurers a menu of risk adjustment schemes to elicit this information. The optimal scheme includes a voluntary reinsurance option. Additionally, the scheme should sometimes be complemented by a community rating requirement. The resulting inefficient coverage of low-cost types lowers the sponsor's cost of separating different insurer types. This allows the sponsor to redistribute more rents from low-cost to high-cost consumers.

Keywords: cherry picking, health insurance, mechanism design, risk adjustment

JEL Classification: D02, D47, I13

Suggested Citation

Bijlsma, Michiel and Boone, Jan and Zwart, Gijsbert, Community Rating in Health Insurance: Trade-Off between Coverage and Selection (November 2015). CEPR Discussion Paper No. DP10943, Available at SSRN: https://ssrn.com/abstract=2696134

Michiel Bijlsma (Contact Author)

De Nederlandsche Bank ( email )

Netherlands

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Jan Boone

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2399 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Gijsbert Zwart

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

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