Imperfect risk adjustment, risk preferences, and sorting in competitive health insurance markets.
I develop a model of insurer price setting and consumer welfare under risk adjustment, a policy commonly used to combat inefficient sorting due to adverse selection in health insurance markets. I use the model to illustrate graphically that risk adjustment causes health plan prices to be based on costs not predicted by the risk adjustment model "residual costs" rather than total costs, either weakening or exacerbating selection problems depending on the correlation between demand and costs predicted by the risk adjustment model. I then use a structural model to estimate the welfare consequences of risk adjustment, finding a welfare gain of over $600 per person year.
Journal of health economics