January 2001

Grant Results

National Program

Changes in Health Care Financing and Organization

SUMMARY

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) (for more information see Grant Results).

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.

Funding
RWJF supported this project through a grant of $29,818.

 See Grant Detail & Contact Information
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THE PROBLEM

Market incentives typically encourage insurers to seek out healthy enrollees because they cost the health plan less. Risk adjustment is the process that offsets these market incentives by compensating those insurance companies that choose to cover less healthy individuals who use more, and more costly, health services.

Policymakers and insurers continue to look for the most equitable and effective way to adjust for risk. Currently, insurers rely on easily observable characteristics of enrollees that are predictors of the need for medical care to adjust for risk. These characteristics include age, sex, geographic residence, and health status.

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THE PROJECT

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

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FINDINGS

The researchers determined that market instruments similar to collateralized mortgage obligations or a health insurance futures contract could be created. However, they noted that unless properly designed, investors would be unlikely to enter such a market. From an investor's perspective, a major drawback to health insurance futures would be that the underlying commodity — health insurance — does not exhibit frequent price fluctuations.

The investigators concluded that reinsurance should be explored as an alternative method 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 pricing and access problems.

Communications

The principal investigator made a presentation at the Northeast Regional Health Economics Research Symposium of the Management Science Group of the Department of Veterans' Affairs in February 1996 (see the Bibliography).

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GRANT DETAILS & CONTACT INFORMATION

Project

Exploration of Market-Based Risk Adjustments for Health Insurance

Grantee

Harvard University School of Public Health (Boston,  MA)

  • Amount: $ 29,818
    Dates: November 1994 to July 1995
    ID#:  026052

Contact

Project Director: Katherine B. Swartz, Ph.D.
(617) 432-4325

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BIBLIOGRAPHY

(Current as of date of this report; as provided by grantee organization; not verified by RWJF; items not available from RWJF.)

Presentations and Testimony

Swartz K. "Market-Based Risk Adjustments for Adverse Risk Selection in Health Insurance," at the Fourth Annual Northeast Regional Health Economics Research Symposium of the Management Science Group of the Department of Veterans' Affairs, Newport, RI, July 21, 1995

Swartz K. "Market-Based Risk Adjustments for Adverse Risk Selection in Health Insurance," at the Harvard-MIT-Boston University Health Economics Seminar, Boston, February 7, 1996.

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Report prepared by: Karin Gillespie
Reviewed by: Marian Bass
Reviewed by: Molly McKaughan
Program Officer: Nancy L. Barrand

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