Competition among differentiated health plans under adverse selection

How complex are the contracts offered by health plans?

“…This includes Medicare and Medicaid in the US, the provision of health care of those under 18 years of age in The Netherlands, the health insurance system in Colombia after the 1993 reform, and the system providing health care to civil servants in Spain. 5 Our results complement what we have learned from the literature dealing with markets where both adverse selection and horizontal differentiation are present (Jack 2006;Olivella and Vera-Hernández 2007;Biglaiser and Ma 2003;Villas-Boas and Schmidt-Mohr 1999). This literature has restricted attention to a very particular form of equilibria: the symmetric separating equilibrium in which the same menu of contracts is used by all health plans to separate risk types.…”

“…More importantly, the competitive equilibrium may fail to be second best. Olivella and Vera-Hernández (2007) show that this will be the case precisely when the equilibrium presents cross subsidization. Jack (2006) analyzes the optimal adjustment of capitation rates in the presence of differentiation.…”

“…8 As mentioned above, our results complement the literature of competition among health plans. Olivella and Vera-Hernández (2007) characterize the symmetric separating equilibrium where each and all health plans offer the same menu of incentive compatible contracts. They show that, despite the introduction of differentiation among health plans, an important feature of the equilibrium in the homogenous product model is retained.…”

Optimal risk adjustment with adverse selection and spatial competition

“…In this paper we assume a horizontally differentiated market structure, and introduce a second dimension of consumer heterogeneity. A number of papers on risk adjustment have adopted such an approach, including Biglaiser and Ma (2003), GM02, Jack (2001), and Olivella and Vera-Hernández (2005). GM00, in which consumers differ only by risk type, is a notable exception.…”

“…They consider the performance of different market structures -in particular examining the issue of "carve outs" in health insurance provision -but do not address the question of differential (i.e., risk-adjusted) payments, except tangentially in their conclusion. Similarly, Olivella and Vera-Hernández (2005) model equilibrium in spatially differentiated insurance markets, but focus more on existence issues than risk adjustment. Finally, Jack (2001) considered the nature of equilibrium in a model with spatially differentiated consumers, but under the constraint that insurance providers set a uniform price and allowed individuals to buy as much insurance as they wished at that price.…”