Mitigating Risk Selection in Health Care Entitlement Programs: A Patient-Level Competitive Bidding Approach

Health care entitlement programs in the U.S. represent a large and growing financial outlay for taxpayers. In the pursuit of operational efficiencies, program administrators often contract with private managed care organizations (MCOs) to procure insurance for beneficiaries. This, however, encourages MCOs to attract the healthiest beneficiaries and avoid the sickest; a phenomenon known as risk selection. This leaves the sickest patients to potentially seek care in safety net facilities or emergency rooms. A mechanism that improves beneficiaries’ access to care without increasing costs would be invaluable to managers and policymakers. This paper investigates whether risk selection can be mitigated with a mechanism where MCOs bid to enroll individual beneficiaries. Although procurement auctions have been studied extensively in the literature, extant research has rarely discussed individual-level bidding. Using game theory, we model an entitlement program under three payment mechanisms: risk-adjustment, bidding, and a mix of prospective payment and bidding. Analytical results show that traditional risk-adjustment cannot optimally be used to eliminate risk selection, while either bidding mechanism eliminates it entirely. Mixed bidding eliminates risk selection at a strictly lower cost than pure bidding. The proposed mixed bidding approach is a new type of mechanism with pre-auction offers that strictly dominates the second-price auction without requiring additional assumptions. Numerical analysis shows bidding dominates risk adjustment in 73.1 percent of simulated parameter sets. Compared to risk adjustment, bidding enrolls 12.1 percent more beneficiaries at 12.7 percent lower cost. Sensitivity analysis reveals that the proposed bidding mechanism dominates in scenarios that more closely resemble real-world health care entitlement environments. More remarkably, bidding would likely generate more cost savings in jurisdictions with a large population of higher risk beneficiaries. These results show that individual-level auctions are a promising mechanism for achieving the dual aim of financial sustainability and expanded access to care for the most vulnerable.