nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒08‒28
ten papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Assessing Incentives for Adverse Selection in Health Plan Payment Systems By Timothy J. Layton; Randall P. Ellis; Thomas G. McGuire
  2. Early Effects of the 2010 Affordable Care Act Medicaid Expansions on Federal Disability Program Participation By Pinka Chatterji; Yue Li
  3. Are Counterparty Arrangements in Reinsurance a Threat to Financial Stability? By Matt Davison; Darrell Leadbetter; Bin Lu; Jane Voll
  4. Insurance and reinsurance risk management in Albania By Heralda, Jahollari
  5. Employment Effects of the ACA Medicaid Expansions By Pauline Leung; Alexandre Mas
  6. Pricing of Catastrophe Risk and the Implied Volatility Smile By Ben Ammar, Semir
  7. Mispricing in Medicare Advantage Risk Adjustment By Jing Chen; Randall P. Ellis; Katherine H. Toro; Arlene S. Ash
  8. Optimal health insurance for multiple goods and time periods By Randall P. Ellis; Shenyi Jian; Willard G. Manning
  9. Characteristics of the Ryan White HIV/AIDS Program Provider Network: Implications for Access to Care Under the Affordable Care Act By Ellen Bouchery; Boyd Gilman; Sylvia Trent-Adams; Laura Cheever
  10. Are Publicly Insured Children Less Likely to be Admitted to Hospital than the Privately Insured (and Does it Matter)? By Diane Alexander; Janet Currie

  1. By: Timothy J. Layton (Harvard Medical School); Randall P. Ellis (Boston University); Thomas G. McGuire (Harvard Medical School, NBER)
    Abstract: Health insurance markets face two forms of adverse selection problems. On the demand side, adverse selection leads to plan price distortions and inefficient sorting of consumers across health plans. On the supply side, adverse selection creates incentives for insurers to inefficiently distort benefits to attract profitable enrollees. These problems can be addressed by features of health plan payment systems such as reinsurance, risk adjustment, and premium categories. In this paper, we develop Harberger-type measures of the efficiency consequences of price and benefit distortions under a given payment system. Our measures are valid, that is, based on explicit economic models of adverse selection. Our measures are complete, in that they are able to incorporate multiple features of plan payment systems. Finally, they are practical, in that they are based on the ex-ante data available to regulators and researchers during the design phase of payment system development, prior to observing actual insurer and consumer behavior. After developing the measures, we compare the performance of the payment system planned for implementation in the ACA Marketplaces in 2017 to several policy alternatives. We show that, in protecting against both types of selection problems, a payment system that incorporates reinsurance and prospective risk adjustment out-performs the planned payment system which includes only concurrent risk adjustment.
    Date: 2015–07–12
  2. By: Pinka Chatterji; Yue Li
    Abstract: We test whether early Affordable Care Act (ACA) Medicaid expansions in Connecticut (CT), Minnesota (MN), California (CA), and the District of Columbia (DC) affected SSI applications, SSI and DI awards, and the number of SSI and DI beneficiaries. We use a difference-in-difference (DD) approach, comparing SSI/DI outcomes pre and post each early Medicaid expansion (“Early Expanders”) to SSI/DI outcomes in states that expanded Medicaid in January 2014 (“Later Expanders”). We also use a synthetic control approach, in which we examine SSI/DI outcomes before and after the Medicaid expansion in each Early Expander state, utilizing a weighted combination of Later Expanders as a comparison group. In CT, the Medicaid expansion is associated a statistically significant, 7 percent reduction in SSI beneficiaries; this finding is consistent across the DD and synthetic control methods. For DC, MN and CA, we do not find consistent evidence that the Medicaid expansions affected disability-related outcomes.
    JEL: I10 I13
    Date: 2016–08
  3. By: Matt Davison; Darrell Leadbetter; Bin Lu; Jane Voll
    Abstract: Interconnectedness among insurers and reinsurers at a global level is not well understood and may pose a significant risk to the sector, with implications for the macroeconomy. Models of the complex interactions among reinsurers and with other participants in the financial system and the real economy are at a very early stage of development. Parts of the market remain opaque to both regulators and market participants, particularly the counterparty arrangements among reinsurers through retrocession agreements. The authors create several plausible networks to model these relationships, each consistent with the financial statement data of the reinsurer. These networks are stress-tested under a series of severe but plausible catastrophic-loss scenarios. This analysis contributes to the literature by (i) applying a network-model approach common in the banking literature to the insurance industry; (ii) assessing the interconnections among reinsurers through potential claims rather than premiums; and (iii) investigating the most opaque part of the global insurance market, namely, counterparty arrangements among global reinsurers (retrocession). The authors find that contagion in the global reinsurance market is plausible and that the size of the potential market disruption is sensitive to (i) the distribution of risk among counterparties, (ii) the trigger for financial distress, (iii) the time horizon for claims resolution and (iv) the degree of loss netting. The findings suggest that further study of industry practices in these four areas would improve our ability to assess risk in the insurance sector and promote financial stability.
    Keywords: Financial stability; Financial system regulation and policies; Financial institutions; Financial services
    JEL: G10 G15 G18 G22 G28 C63
    Date: 2016
  4. By: Heralda, Jahollari
    Abstract: Risk management in insurance and reinsurance companies is a very important element, which enables the organization to meet its obligations to customers and to survive in the market place. In order to be managed properly, the risk must be first identified correctly. The damage must be assessed carefully and using efficient methods, for the evaluation to be more realistic. This paper is the result of the use of several methods. Besides the theoretical and narration aspects, the paper also relies on the comparative method, as it addresses the practices followed by the Member States as well as Albania, a country that has recently adopted a new law, aiming to align its legislation with the acquis communautaire. The study shows that the Albanian legislation provides the necessary guarantees to ensure that companies will manage risk in the best way possible and will create all the necessary structures for this purpose. In this regard, we can say that the alignment with the acquis communautaire has been successfully accomplished.
    Keywords: risk, risk management, insurance, reinsurance, analysis, law, alignment
    JEL: K20
    Date: 2016–02
  5. By: Pauline Leung; Alexandre Mas
    Abstract: We examine whether the recent expansions in Medicaid from the Affordable Care Act reduced “employment lock” among childless adults who were previously ineligible for public coverage. We compare employment in states that chose to expand Medicaid versus those that chose not to expand, before and after implementation. We find that although the expansion increased Medicaid coverage by 3.0 percentage points among childless adults, there was no significant impact on employment.
    JEL: H0 J0 J18
    Date: 2016–08
  6. By: Ben Ammar, Semir
    Abstract: Property-casualty (P&C) insurers are exposed to rare but severe natural disasters. This paper analyzes the relation between catastrophe risk and the implied volatility smile of insurance stock options. We find that the slope is significantly steeper compared to non-financials and other financial institutions. We show that this effect has increased over time, suggesting a higher risk compensation for catastrophic events. We are able to link the insurance-specific tail risk component derived from options with the risk spread from catastrophe bonds. Our results provide an accurate, high-frequency calculation for catastrophe risk linking the traditional derivatives market with insurance-linked securities (ILS).
    Keywords: Implied volatility, Options, Catastrophe risk, Tail risk, Natural disasters
    JEL: G12 G13 G14 G22
    Date: 2016–07
  7. By: Jing Chen (EMC Corporation); Randall P. Ellis (Boston University); Katherine H. Toro (University of Massachusetts Medical School); Arlene S. Ash (Verisk Health)
    Abstract: The Center for Medicare and Medicaid Services implemented hierarchical condition category (CMS-HCC) models in 2004 to adjust payments to Medicare Advantage (MA) plans to reflect enrollees’ expected health care costs. We use DxCG Medicare models, refined “descendants†of the same HCC framework with 189 comprehensive clinical categories available to CMS in 2004, to reveal two mispricing errors resulting from CMS’ implementation. One comes from ignoring all diagnostic information for “new enrollees†(those with less than 12 months of prior claims). Another comes from continuing to use the simplified models which were originally adopted in response to assertions from some capitated health plans that submitting the claims-like data that facilitate richer models was too burdensome. Even the main CMS model being used in 2014 recognizes only 79 condition categories, excluding many diagnoses and merging conditions with somewhat heterogeneous costs. Omitted conditions are typically lower cost or “vague†and not easily audited from simplified data submissions. In contrast, DxCG Medicare models use a comprehensive, 394-HCC classification system. Applying both models to Medicare’s 2010 - 2011 Fee-For-Service five-percent sample, we find mispricing and lower predictive accuracy for the CMS implementation. For example, in 2010, 13% of beneficiaries had at least one higher-cost DxCG- recognized condition, but no CMS-recognized, condition; their 2011 actual costs averaged $6,628, almost one-third more than the CMS model prediction. Since MA plans must now supply encounter data, CMS should consider using more refined and comprehensive (DxCG-like) models.
    Keywords: Medicare, CMS-HCC, DxCG, risk adjustment, payment models
    Date: 2015
  8. By: Randall P. Ellis (Boston University); Shenyi Jian (Renmin University of China); Willard G. Manning (Harris School of Public Policy Studies, The University of Chicago)
    Abstract: We examine the efficiency-based arguments for second-best optimal health insurance with multiple treatment goods and multiple time periods. Correlated shocks across health care goods and over time interact with complementarity and substitutability to affect optimal cost sharing. Health care goods that are substitutes or have positively correlated demand shocks should have lower optimal patient cost sharing. Positive serial correlations of demand shocks and uncompensated losses that are positively correlated with covered health services also reduce optimal cost sharing. Our results rationalize covering pharmaceuticals and outpatient spending more fully than is implied by static, one good, or one period models.
    Date: 2015
  9. By: Ellen Bouchery; Boyd Gilman; Sylvia Trent-Adams; Laura Cheever
    Abstract: This study provides a baseline view of the HIV care system prior to implementation of the Patient Protection and Affordable Care Act (ACA).
    Keywords: Health care workforce, HIV care, health care practitioners, workforce projections
    JEL: I
  10. By: Diane Alexander; Janet Currie
    Abstract: There is continuing controversy about the extent to which publicly insured children are treated differently than privately insured children, and whether differences in treatment matter. We show that on average, hospitals are less likely to admit publicly insured children than privately insured children who present at the ER and the gap grows during high flu weeks, when hospital beds are in high demand. This pattern is present even after controlling for detailed diagnostic categories and hospital fixed effects, but does not appear to have any effect on measurable health outcomes such as repeat ER visits and future hospitalizations. Hence, our results raise the possibility that instead of too few publicly insured children being admitted during high flu weeks, there are too many publicly and privately insured children being admitted most of the time.
    JEL: I13
    Date: 2016–08

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