Flavors of competition in insurance markets

In a new paper, Chapin White covers issues pertaining to competition in insurance markets raised in two of my recent posts (one, two), though he covers a great deal more. The central tension is simplicity (which promotes price competition) and flexibility (which promotes innovation, though not necessarily that which benefits all consumers). He writes,

Healthy competition consists of insurer efforts to increase value for policyholders by producing better health outcomes at lower total cost. Unhealthy competition consists of insurer efforts to avoid insuring sicker people, to confuse policyholders or to avoid paying legitimate claims.

Standardization is one way to promote price competition and reduce innovation that promotes selection differences (some plans attracting much healthier beneficiaries than other plans). However, there are ways to mitigate the adverse consequences of selection. So is standardization really required? In the context of the ACA exchanges, Chapin answers,

The need for standardization will depend in part on the effectiveness of these other mechanisms, and vice versa. These mechanisms include: a risk-adjustment process that will transfer funds from plans that disproportionately enroll healthy people to plans that disproportionately enroll sicker people; ∙an explicit prohibition on “marketing practices or benefit designs that have the effect of discouraging the enrollment in such plan by individuals with significant health needs;” a temporary reinsurance program that will transfer funds to insurers that enroll sick individuals when the exchanges first open; a temporary risk corridor program that will partially reimburse insurers with large financial losses and partially recoup large financial gains; and the individual mandate and associated penalties, which are designed to help ensure that healthy individuals participate in the exchanges.

The paper is ungated and many of the issues it covers are relevant to premium support in Medicare, as well as the ACA.

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