Designing employer health benefits for a heterogeneous workforce: risk adjustment and its alternatives.

Many health economists recommend that employers provide employees with a risk-adjusted choice among competing health insurance plans. However, formal risk adjustment is rarely if ever used by employers. This paper examines a range of health benefit design options available to employers, focusing attention not only on risk adjustment but also on its alternatives. We argue that while formal risk adjustment is rare, employers commonly use strategies that accomplish some of the same objectives at less cost.

Optimal health insurance: the case of observable, severe illness.

We explore optimal cost-sharing provisions for insurance contracts when individuals have observable, severe diseases with a discrete number of medically appropriate treatment options. Variation in preferences for alternative treatments is unobserved by the insurer and non-contractible. Interest in such situations is increasingly common, exemplified by disease carve-out programs and shared decision-making (SDM) tools. We demonstrate that optimal insurance charges a copay to patients choosing the high-cost treatment and provides consumers of the low-cost treatment a cash payment. A simulation of the effect of such a policy, based on prostate cancer, indicates a substantial reduction in moral hazard.

Adjusted community rate reforms to promote HMO participation in Medicare+Choice.

The authors review the financial regulations imposed on health maintenance organizations (HMOs) that participate in the Medicare+Choice program and identify elements of the regulations that may discourage HMO participation in the program. Modifications of the regulations are proposed that could encourage the participation of HMOs without affording them excessive profit. The modifications include smoothing and bounding profit estimates and authorizing and encouraging expanded use of benefit stabilization funds.