Health Affairs March 27, 2025
In an individual insurance market, plan payments are risk-adjusted to limit distortions in plan offerings that arise from incentives to select favorable risks. With this objective in mind, risk adjustment is often reduced to a statistical goal—to maximize the fit of a predictive model to spending data—in an attempt to vary per-person payments across plans according to the expected costs of the populations they attract.
However, improving fit (often called predictive accuracy) to limit selection incentives tends to exacerbate other distortionary incentives; it comes at a cost. In this two-part article, I summarize...
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