Abstract
A major challenge in regulated health insurance markets is to mitigate risk selection potential. Risk selection can occur in the presence of unpriced risk heterogeneity, which refers to predictable variation in health care spending not reflected in either premiums by insurers or risk equalization payments. This paper examines unpriced risk heterogeneity within risk groups distinguished by the sophisticated Dutch risk equalization model of 2016. Our strategy is to combine the administrative dataset used for estimation of the risk equalization model (n = 16.9 million) with information derived from a large health survey (n = 387k). The survey information allows for explaining and predicting residual spending of the risk equalization model. Based on the predicted residual spending, two metrics are used to indicate unpriced risk heterogeneity at the individual level and at the level of certain (risk) groups: the correlation coefficient between residual spending and predicted residual spending, and the mean absolute value of predicted residual spending. The analyses yield three main findings: (1) the health survey information is able to explain some residual spending of the risk equalization model, (2) unpriced risk heterogeneity exists both in morbidity and in non-morbidity groups, and (3) unpriced risk heterogeneity increases with predicted spending by the risk equalization model. These findings imply that the sophisticated Dutch risk equalization model does not completely remove unpriced risk heterogeneity. Further improvement of the model should focus on broadening and refining the current set of morbidity-based risk adjusters.
Highlights
Many countries have based their health insurance system on principles of regulated competition [18]
We deliberately examine the absolute values of predicted residual spending and not the relative amount of heterogeneity that can be explained by the prediction model (e.g. ||ê||j as a percentage of |ē|j ), as incentives for risk selection are primarily determined by absolute differences between spending and revenues
This conclusion is reinforced when comparing the above mentioned R2 values to the R2 of the risk equalization model itself: 28.1%. This shows that the information in the health survey is able to explain only a portion of the variance in residual spending of the Dutch risk equalization model of 2016
Summary
Many countries have based their health insurance system on principles of regulated competition [18]. In these systems, health insurers compete on price (i.e., the premium) and quality (e.g., in terms of the contracted provider network) within a regulatory framework set by the government. Health insurers compete on price (i.e., the premium) and quality (e.g., in terms of the contracted provider network) within a regulatory framework set by the government This regulatory framework aims to achieve public goals, such as. One of the main challenges in regulated health insurance markets is to avoid risk selection [6, 11, 15, 18].
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