The high costs of death: should health plans get higher payments when members die?

Abstract

Since 1993, major reforms have been implemented in the Dutch social health insurance system. The competing sickness funds receive risk-adjusted capitation payments based on age, gender, region, and a disability indicator. As these very crude health indicators do not reflect expected costs accurately, an extensive ex post equalization between sickness funds takes place. Mortality has been suggested as an additional risk adjuster, mainly because of high health care expenditures before death. The authors investigated whether capitation payments could be improved by using mortality as a risk adjuster. Using data sets that cover a general population and contain individual-level information on demographic characteristics, health care costs, hospitalizations, and year of death (when applicable), expenditures in a period of up to 7 years before death and the consequences for capitation payments if mortality-related costs are taken into account, were analyzed. For a general population, costs per person-year in the last calendar year of life were estimated at 15.3 times average. For those younger than 65 years, this number was 27.3 times average, and for the elderly, it was 4.7 times average. Most of these excess costs were unpredictable. Even with the most comprehensive regression model, actual costs of decedents were still 250% higher than predicted costs. Mortality would improve capitation payments marginally, at best. The empirical findings, added to theoretical and practical problems of using mortality in this context, suggest that mortality should not be used as a risk adjuster. Further research should be directed at other, more promising risk adjusters.