Mandatory pooling as a supplement to risk-adjusted capitation payments in a competitive health insurance market

High-risk pooling for mitigating risk selection incentives in health insurance markets with sophisticated risk equalization: an application based on health survey information

BACKGROUND

Despite sophisticated risk equalization, insurers in regulated health insurance markets still face incentives to attract healthy people and avoid the chronically ill because of predictable differences in profitability between these groups. The traditional approach to mitigate such incentives for risk selection is to improve the risk-equalization model by adding or refining risk adjusters. However, not all potential risk adjusters are appropriate. One example are risk adjusters based on health survey information. Despite its predictiveness of future healthcare spending, such information is generally considered inappropriate for risk equalization, due to feasibility challenges and a potential lack of representativeness.

METHODS

We study the effects of high-risk pooling (HRP) as a strategy for mitigating risk selection incentives in the presence of sophisticated- though imperfect- risk equalization. We simulate a HRP modality in which insurers can ex-ante assign predictably unprofitable individuals to a 'high risk pool' using information from a health survey. We evaluate the effect of five alternative pool sizes based on predicted residual spending post risk equalization on insurers' incentives for risk selection and cost control, and compare this to the situation without HRP.

RESULTS

The results show that HRP based on health survey information can substantially reduce risk selection incentives. For example, eliminating the undercompensation for the top-1% with the highest predicted residual spending reduces selection incentives against the total group with a chronic disease (60% of the population) by approximately 25%. Overall, the selection incentives gradually decrease with a larger pool size. The largest marginal reduction is found moving from no high-risk pool to HRP for the top 1% individuals with the highest predicted residual spending.

CONCLUSION

Our main conclusion is that HRP has the potential to considerably reduce remaining risk selection incentives at the expense of a relatively small reduction of incentives for cost control. The extent to which this can be achieved, however, depends on the design of the high-risk pool.

Do health insurers use target marketing as a tool for risk selection? Evidence from the Netherlands

In health care systems based on managed competition, enrolees can choose between insurers who are positioned as prudent buyers of care on their behalf. To avoid risk selection, insurers are compensated through a system of risk equalisation. The Dutch system of risk equalisation is generally considered to be one of the most sophisticated in the world. Empirical evidence, however, shows there are still consumer segments that are profitable for insurers. To examine whether insurers use target marketing for attracting these segments, we assessed promotional material used by Dutch insurers during the switching season of 2019. Our findings provide preliminary evidence that large insurers with different brands primarily use their sub brands as strategic vehicles to improve their competitive positions by targeting these brands at financially favourable groups and price sensitive buyers. By contrast, the more visible main brands are targeted at a much broader spectrum of consumer groups to display the insurer's social character. Only a minority of insurers' marketing expressions are targeted at actual users of care. Despite continuous improvements in the risk equalisation system, on average this group is still unprofitable for insurers. From a health policy perspective, further improvements are key to motivate health insurers to target their efforts at improving care for the chronically ill and to eliminate incentives for risk selection.

Value-based provider payment: towards a theoretically preferred design

Worldwide, policymakers and purchasers are exploring innovative provider payment strategies promoting value in health care, known as value-based payments (VBP). What is meant by 'value', however, is often unclear and the relationship between value and the payment design is not explicated. This paper aims at: (1) identifying value dimensions that are ideally stimulated by VBP and (2) constructing a framework of a theoretically preferred VBP design. Based on a synthesis of both theoretical and empirical studies on payment incentives, we conclude that VBP should consist of two components: a relatively large base payment that implicitly stimulates value and a relatively small payment that explicitly rewards measurable aspects of value (pay-for-performance). Being the largest component, the base payment design is essential, but often neglected when it comes to VBP reform. We explain that this base payment ideally (1) is paid to a multidisciplinary provider group (2) for a cohesive set of care activities for a predefined population, (3) is fixed, (4) is adjusted for the population's risk profile and (5) includes risk-mitigating measures. Finally, some important trade-offs in the practical operationalisation of VBP are discussed.

The power of reinsurance in health insurance exchanges to improve the fit of the payment system and reduce incentives for adverse selection

Risk adjustment and reinsurance protect plans against risk of losses and contend with adverse selection in the new health insurance Exchanges. This article assesses the power of reinsurance in the context of other plan payment features, including prospective and concurrent risk adjustment. Using data from the Medicare Expenditure Panel Survey (MEPS) to draw an "Exchange population," we simulate the contribution of reinsurance to improving the fit of the payment system to plan costs and to mitigating incentives for adverse selection for groups of enrollees with selected chronic illnesses. Modest reductions in attachment points equate the payment-system fit of retrospective to concurrent risk adjustment. Reinsurance is very powerful in fitting payments to costs and moderately effective in dealing with selection incentives.

Optimal cost reimbursement of health insurers to reduce risk selection

In the absence of a perfect risk adjustment scheme, reimbursing health insurers' costs can reduce risk selection in community-rated health insurance markets. In this paper, we develop a model in which insurers determine the cost efficiency of health care and have incentives for risk selection. We derive the optimal cost reimbursement function, which balances the incentives for cost efficiency and risk selection. For health cost data from a Swiss health insurer, we find that an optimal cost reimbursement scheme should reimburse costs only up to a threshold.

Hybrid risk adjustment for pharmaceutical benefits

This paper analyses the application of hybrid risk adjustment versus either prospective or concurrent risk adjustment formulae in the context of funding pharmaceutical benefits for the population of an integrated healthcare delivery organisation in Catalonia during years 2002 and 2003. We apply a mixed formula and find that, compared to prospective only models, a hybrid risk adjustment model increases incentives for efficiency in the provision for low risk individuals in health organisations, not only as a whole but also within each internal department, by reducing within-group variation of drug expenditures.

Determinants of health care utilization by German sickness fund members--with application to risk adjustment

In many countries, social health insurance systems are being reformed in favor of more competition among insurers, while premiums are community rated by regulation. The implicit incentives for insurers to engage in risk selection can only be curtailed using appropriate systems of risk-adjusted equalization payments among insurers. To develop these systems, predictors of individual utilization patterns have to be identified, e.g. via regression analysis using previous utilization data. In some countries such as Germany, such data are hardly ever available. In the early nineties, a number of sickness funds participated in an experiment in which individual utilization data were collected. Our data set covers more than 70,000 members of company sickness funds over a 5-year period. We analyze socio-demographic determinants of utilization which could be used as risk adjusters in a risk equalization scheme. Our results suggest that besides age and sex, the set of risk adjusters should include income, family status and a dummy for the last year of life.

Risk sharing as a supplement to imperfect capitation: a tradeoff between selection and efficiency

This paper describes forms of risk sharing between insurers and the regulator in a competitive individual health insurance market with imperfectly risk-adjusted capitation payments. Risk sharing implies a reduction of an insurer's incentives for selection as well as for efficiency. In a theoretical analysis, we show how the optimal extent of risk sharing may depend on the weights the regulator assigns to these effects. Some countries employ outlier or proportional risk sharing as a supplement to demographic capitation payments. Our empirical results strongly suggest that other forms of risk sharing yield better tradeoffs between selection and efficiency.

Access to coverage for high-risks in a competitive individual health insurance market: via premium rate restrictions or risk-adjusted premium subsidies?

A competitive market for individual health insurance tends to risk-adjusted premiums. Premium rate restrictions are often considered a tool to increase access to coverage for high-risk individuals in such a market. However, such regulation induces selection which may have several adverse effects. As an alternative approach we consider risk-adjusted premium subsidies. Empirical results of simulated premium models and subsidy formulae are presented. It is shown that sufficiently adjusted subsidies eliminate the need for premium rate restrictions and consequently avoid their adverse effects. Therefore, the subsidy approach is the preferred strategy to increase access to coverage for high-risk individuals.

Ignoring small predictable profits and losses: a new approach for measuring incentives for cream skimming

Under inadequate capitation formulae competing health insurers have an incentive for cream skimming, i.e., the selection of enrollees whom the insurer expects to be profitable. When evaluating different capitation formulae, previous studies used various indicators of incentives for cream skimming. These conventional indicators are based on all actual profits and losses or on all predictable profits and losses. For the latter type of indicators, this paper proposes, as a new approach, to ignore the small predictable profits and losses. We assume that this new approach provides a better indication of the size of the cream skimming problem than the conventional one, because an insurer has to take into account its costs of cream skimming and the (statistical) uncertainties about the net benefits of cream skimming. Both approaches are applied in theoretical and empirical analyses. The results show that, if our assumption is right, the problem of cream skimming is overestimated by the conventional ways of measuring incentives for cream skimming, especially in the case of relatively good capitation formulae.

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

OBJECTIVES

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.

METHODS

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.

RESULTS

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.

CONCLUSION

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.

Risk-adjusted capitation payments: developing a diagnostic cost groups classification for the Dutch situation

In many countries market-oriented health care reforms are high on the political agenda. A common element of these reforms is that the consumers may choose among competing health insurers or health plans, which are largely financed through premium-replacing capitation payments. Since 1993, Dutch sickness funds receive risk-adjusted capitation payments based on demographic factors. It has been shown that the predictive accuracy of a demographic capitation model improves when it is extended with diagnostic information from prior hospitalizations, in the form of Diagnostic Costs Groups (DCGs). In this study a DCG classification is developed using Dutch cost data of sickness fund members of all ages. The study also dealt with the question of how to handle high discretion diagnoses. For the Dutch situation high discretion diagnoses may be defined as those diagnoses for which day case treatment is a possible alternative for a hospital admission. Grouping persons with a hospital admission for high discretion diagnoses together with people without an admission resulted in a slight reduction of the predictive accuracy of the DCG model. Adequate risk-adjustment is critical to the success of market-oriented health care reforms. The use of diagnostic information from prior hospitalizations seems a promising option for improving the capitation formula.