Employer risk‐adjustment transitions with inertial consumers: Evidence from CalPERS

Abstract

Risk-adjustment policies, which transfer money from insurers with healthy consumers to those with sick consumers, are an important tool to contend with adverse selection in health insurance markets. While the steady-state properties of risk-adjustment have been studied extensively, there is less evidence on the transition phase of policy implementation. We study the introduction and removal of risk-adjustment at California Public Employees' Retirement System and show that these changes meaningfully impact premiums via plan differences in enrollee health status. Despite these premium differences, there is limited consumer resorting due to consumer inertia, though new active enrollees respond more fluidly. We show that, with inertial consumers, risk-adjustment changes have substantial distributional consequences, leading to worse outcomes for sicker consumers when removed and vice-versa when implemented. We estimate a model of plan choice with premium sensitivity, brand preferences, and inertia and use these estimates to study the interaction between riskadjustment policies and the strength of inertia.

Special issue on health insurer decision‐making

“…A key insight that emerges from this collection of papers is that the effects of specific "managed-competition" incentives depend crucially on interactions with other government policies and the finer details of how those policies are implemented. For example, in this issue Handel et al (2023) examine what happened when an agency that administers health benefits for a large number of public employees in California enacted, and then later removed, a risk adjustment program. This risk adjustment system provided transfers to insurance companies that offered plans that attracted employees with above-average risks and transfers from those with below-average risks.…”

“…This risk adjustment system provided transfers to insurance companies that offered plans that attracted employees with above-average risks and transfers from those with below-average risks. Handel et al (2023) highlight that an important feature of this employment-based health insurance system is the passive re-enrollment of many individuals in their health plan each year. How this consumer inertia interacts with the risk adjustment policy depends, though, on details about how premiums are determined.…”

“…The other five papers in this issue address issues around the operation of insurance markets that involve “managed competition.” Three papers (Handel et al, 2023; Henriquez et al, 2023; Klein et al, 2023) analyze issues related to risk adjustment, which occur in systems where premiums are (partially) community rated and involve transfers from insurers who attract below‐average risk pools to those who attract above‐average risks. A fourth paper (P. H. Born, Tice Sirmans, et al, 2023), examines how health insurers adjusted their expenditures on quality improvement programs in reaction to regulations on minimum loss ratios under the ACA.…”

“…Handel et al (2023) highlight that an important feature of this employment‐based health insurance system is the passive re‐enrollment of many individuals in their health plan each year. How this consumer inertia interacts with the risk adjustment policy depends, though, on details about how premiums are determined.…”

How does medical insurance contribution affect corporate value? Evidence from China

“…Involving a stricter MI collector (the tax authorities in our context) mitigates the free-rider problem and market failure. In addition, given that firms in | 87 different industries with R&D intensities and areas with different air pollution levels have heterogeneous free-rider issues, designing a proper risk-adjustment mechanism that takes data availability constraints and employee inertia into account, especially during the reformtransition period, is also important (see, e.g., Handel et al, 2023;Henriquez et al, 2023). It is also crucial to help governments improve equity in the public health insurance system.…”