Health plans and selection: Formal risk adjustment vs. market design and contracts

In this paper, we explore the demand for risk adjustment by health plans th at contract with private employers by considering the conditions under whic h plans might value risk adjustment. Three factors reduce the value of risk adjustment from the plans' point of view. First, only a relatively small s egment of privately insured Americans face a choice of competing health pla ns. Second, health plans share much of their insurance risk with payers, pr oviders, and reinsurers. Third, de facto experience rating that occurs duri ng the premium negotiation process and management of coverage appear to sub stitute for risk adjustment. While the current environment has not generate d much demand for risk adjustment, we reflect oil its future potential.