Figure 1.

Fit-Power Tradeoff in Insurance Payment Systems

Notes: Figure illustrates the tradeoff between power and fit in insurance market payment systems. Fit, defined as the fraction of the variance of costs explained by payments as in Equation (1), is plotted along the vertical axis. Power, defined as the share of costs at the margin born by the health plan as in Equation (4), is plotted along the horizontal axis. Points in black illustrate the exact fit-power combination for several payment system types. The solid and dashed curves trace the fit-power tradeoff in mixed systems over a range of parameter values for the weight put on the prospective portion of payment, as in Equation (2). The cloud at D illustrates the theoretically ambiguous set of potential points representing the incentives under capitation with diagnostic-based risk adjustment.