Risk sharing as a supplement to imperfect capitation: a tradeoff between selection and efficiency

This paper describes forms of risk sharing between insurers and the regulat or in a competitive individual health insurance market with imperfectly ris k-adjusted capitation payments. Risk sharing implies a reduction of an insu rer's incentives for selection as well as for efficiency. In a theoretical analysis, we show how the optimal extent of risk sharing may depend on the weights the regulator assigns to these effects. Some countries employ outli er or proportional risk sharing as a supplement to demographic capitation p ayments. Our empirical results strongly suggest that other forms of risk sh aring yield better tradeoffs between selection and efficiency. (C) 2001 Els evier Science B.V. All rights reserved.