Market reform of health insurance is proposed to increase coverage and reduce growth in spending by providing an incentive to choose low-cost plans. However, having a choice of plans could result in risk segmentation. Risk-adjusted payments have been proposed to address risk segmentation but are criticized as ineffective. An alternative to risk adjustment is to subsidize premiums, as in the Federal Employees Health Benefits Program (FEHBP). Subsidizing premiums may also increase total premium spending. We find that there is little risk segmentation in the FEHBP and that reducing the premium subsidy would lower government premium spending and slightly increase risk segmentation.
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