Risk Equalisation in Ireland and Australia: A Simulation Analysis to Compare Outcomes

John Armstrong () and Francesco Paolucci ()
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John Armstrong: Institute of Public Administration, Lansdowne Road, Dublin 4, Ireland.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2010, vol. 35, issue 4, 538 pages

Abstract: Risk equalisation has been implemented in a number of countries as a means of providing explicit risk-adjusted transfers between health insurance undertakings to improve efficiency within the health insurance market, and make health insurance affordable. Two such countries are Australia and Ireland. In this article, a simulation exercise is carried out to compare the effectiveness of the two countries’ risk equalisation schemes in meeting the policy objectives of encouraging insurers to be efficient and discouraging them from engaging in risk selection. The results of the analysis show that the Australian scheme is less effective than the Irish scheme in reducing the incentive for risk selection and in encouraging insurers to be efficient. The results provide evidence that direct standardisation mechanisms (as used in Ireland) can lead to superior outcomes as compared to indirect standardisation mechanisms (as used in Australia) in terms of promoting efficiency and deterring risk selection.

Date: 2010
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