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Hedging Medical Spending Growth: An Adaptive Expectations Approach
1Jefferson College of Population Health, Thomas Jefferson University, Philadelphia, PA; Sidney Kimmel Cancer Center, Thomas Jefferson University, Philadelphia, PA.
Applied Finance and Accounting
|September 17, 2016
Summary
Financial assets like bonds can hedge against medical spending growth risk, but strategies involve shorting assets. Health insurers should use bond hedges and diversification for long-term contracts.
Area of Science:
- Health Economics
- Financial Risk Management
- Insurance Markets
Background:
- Long-term health insurance protects against sustained negative health events.
- Rising medical spending growth introduces uncertainty and challenges in insuring health risks.
- Financial assets are explored as potential hedges against medical spending growth risk.
Purpose of the Study:
- To investigate the existence and nature of financial hedges for medical spending growth risk.
- To identify asset classes that can effectively mitigate the financial impact of unpredictable healthcare cost increases.
Main Methods:
- Statistical analysis of asset class performance against medical spending growth.
- Examination of hedging strategies, including asset shorting.
Main Results:
- Bonds demonstrated stronger statistical evidence as hedges compared to stocks.
- Effective hedging strategies for medical spending growth necessitate shorting assets (betting against the market).
Conclusions:
- Health insurers should integrate bond market hedges with portfolio diversification for long-term contracts.
- Policy interventions aimed at moderating medical spending growth uncertainty could benefit insurers.
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