Introducing Risk Adjustment and Free Health Plan Choice in Employer-Sponsored Health Insurance: Evidence from Germany

This paper studies the effects of introducing a Risk Adjustment Scheme (RAS) and allowing consumers to switch health plans across employers in the German public health insurance market. German legislature introduced a simple RAS based on age, gender and disability status in 1994. Effective 1996, consumers could switch to hundreds of existing health plans, across employers and state-borders. Our main findings are based on representative enrollee panel data linked to administrative RAS and health plan price data. Using RAS allocations as instruments for health plan prices, we show that sickness funds with bad risk pools and high pre-RAS premiums lowered their total premiums by e 400 per e 1000 allocated by the RAS. Consequently, after the implementation of the RAS, health plan prices converged, but not fully. Because switchers are more likely to be white collar, young and healthy, the new consumer choice resulted in more risk segregation across sickness funds. As a consequence, the amount of money redistributed by the RAS increased over time.