Measuring Selection Incentives in Managed Care: Evidence From the Massachusetts State Employee Insurance Program

Summary

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Capitation payment - or any payment featuring supply-side cost sharing (Ellis and McGuire, 1990) - gives health plans and providers the incentive to manipulate their offerings to deter the sick and attract the healthy. This behavior is variously known as risk selection, plan manipulation, cream skimming, or cherry picking (Newhouse, 1996; Cutler and Zeckhauser, 1998, 2000). When health plans compete to avoid the sick rather than provide quality care, the most vulnerable patients may experience access problems, and all patients suffer from the selection-motivated distortions in quality. Selection may also prevent individuals from being able to buy insurance against becoming a bad risk in the future (Newhouse, 1996; Feldman and Dowd, 2000). Selection thus poses problems of both efficiency and equity. In this article, we estimate empirically how a profit-maximizing insurer would want to distort service offerings to attract profitable enrollees.

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Measuring Selection Incentives in Managed Care: Evidence From the Massachusetts State Employee Insurance Program

INTRODUCTION

Capitation payment - or any payment featuring "supply-side cost sharing" (Ellis and McGuire, 1990) - gives health plans and providers the incentive to manipulate their offerings to deter the sick and attract the healthy. This behavior is variously known as "risk selection," "plan manipulation," "cream skimming," or "cherry picking" (Newhouse, 1996; Cutler and Zeckhauser, 1998, 2000).1 When health plans compete to avoid the sick rather than provide quality care, the most vulnerable patients may experience access problems, and all patients suffer from the selection-motivated distortions in quality. Selection may also prevent individuals from being able to buy insurance against becoming a bad risk in the future (Newhouse, 1996; Feldman and Dowd, 2000). Selection thus poses problems of both efficiency and equity.

Some societies embrace single-payer systems, which help to minimize selection concerns. Within multipayer systems, employers and other purchasers often enforce open enrollment periods, proscribe preexisting conditions clauses, and stipulate standard benefit packages. Yet competing insurers may engage in ma...

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