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Discussion Paper Details

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Title: Community rating in health insurance: trade-off between coverage and selection

Author(s): Michiel Bijlsma, Jan Boone and Gijsbert Zwart

Publication Date: November 2015

Keyword(s): cherry picking, health insurance, mechanism design and risk adjustment

Programme Area(s): Industrial Organization and Public Economics

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.

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Bibliographic Reference

Bijlsma, M, Boone, J and Zwart, G. 2015. 'Community rating in health insurance: trade-off between coverage and selection'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10943