Should Government Encourage Use of Market Forces in Spreading Health Insurance Risks?

Exploration of market-based risk adjustments for health insurance

During 1994 and 1995, investigators at Harvard University School of Public Health analyzed the high-risk auto insurance market, secondary mortgage markets, and the futures and options markets to determine whether these sectors of the insurance market offer lessons for the health sector. The project looked specifically at how these markets spread risk.

The objective of the study was to assist policy-makers in determining whether the government should encourage the development of a market-driven method for determining risk for health insurance.

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO).

Key Findings

  • The investigators concluded that:

    • Reinsurance should be explored for dealing with adverse risk selection in health care.
    • Under a prospective payment system that uses risk adjusters to determine the payment amount for each individual, there are no incentives for providers to deliver high quality care to a patient who develops medical problems.
    • The researchers cautioned that risk adjusters are not the only way to deal with risk selection—and no single risk adjustment method will solve all the pricing and access problems.