The goal of risk equalization in regulated competitive health insurance markets

Wynand van de Ven*, Gerrit Hamstra, Richard van Kleef, Mieke Reuser, Piet Stam

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

4 Citations (Scopus)
10 Downloads (Pure)

Abstract

Different opinions exist about the goal of risk equalization in regulated competitive health insurance markets. There seems to be consensus that an element of the goal of risk equalization is ‘to remove the predictable over- and undercompensations of subgroups of insured’ or, equivalently, ‘to achieve a level playing field for each risk composition of an insurer’s portfolio’ or, equivalently, ‘to remove the incentives for risk selection’. However, the role of efficiency appears to be a major issue: should efficiency also be an element of the goal of risk equalization, or should it be a restriction to the goal, or should efficiency not be an element of the goal or a restriction to the goal? If efficiency plays a role, a comprehensive analysis of the total effect of risk equalization on efficiency needs to be done. An improvement of the performance of a risk equalization scheme has both negative and positive effects on efficiency. Negative effects include the reduction in efficiency via cost- or utilization-based risk adjusters. Positive effects result from leveling the playing field and reducing the incentives for risk selection, which increase efficiency as the outcome of a competitive market. In practice many regulators and policy makers take efficiency into consideration by looking at the negative effects, but hardly at the positive effects. The definition of the goal of risk equalization has consequences for the design and evaluation of risk equalization schemes and for the equalization payments. We describe relevant potential goals, tradeoffs and possible solutions.

Original languageEnglish
Pages (from-to)111-123
Number of pages13
JournalEuropean Journal of Health Economics
Volume24
Issue number1
Early online date29 Mar 2022
DOIs
Publication statusPublished - Feb 2023

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Publisher Copyright: © 2022, The Author(s).

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