Risk Equalization and Risk Adjustment, the European Perspective

Several European countries have chosen to have a competitive social health insurance market. A major challenge for these countries is to organize the cross subsidies from the low risks to the high risks without creating incentives for inefficiency or for risk selection. In theory good risk equalization is an effective strategy. Because in practice the implementation of good risk equalization is complex, policymakers are confronted with a trade-off between affordability, efficiency, and the adverse effects of risk selection. Although most of the experience in Europe is with risk-adjusted payments to insurers, the relevance of risk-adjusted payments to providers is strongly increasing.