Very high and low residual spenders in private health insurance markets: Germany, The Netherlands and the U.S. Marketplaces

Thomas G. McGuire, Sonja Schillo and Richard C. Kleef ()
Additional contact information
Thomas G. McGuire: Harvard Medical School
Sonja Schillo: University of Duisburg-Essen
Richard C. Kleef: Erasmus University Rotterdam

The European Journal of Health Economics, 2021, vol. 22, issue 1, No 4, 35-50

Abstract: Abstract We study the extremely high and low residual spenders in individual health insurance markets in three countries. A high (low) residual spender is someone for whom the residual—spending less payment (from premiums and risk adjustment)—is high (low), indicating that the person is highly underpaid (overpaid). We begin with descriptive analysis of the top and bottom 1% and 0.1% of residuals building to address the question of the degree of persistence in membership at the extremes. Common findings emerge among the countries. First, the diseases found among those with the highest residual spending are also disproportionately found among those with the lowest residual spending. Second, those at the top of the residual spending distribution (where spending exceeds payments the most) account for a massively high share of the unexplained variance in the predictions from the risk adjustment model. Third, in terms of persistence, we find that membership in the extremes of the residual spending distribution is highly persistent, raising concerns about selection-related incentives targeting these individuals. As our results show, the one-in-a-thousand people (on both sides of the residual distribution) play an outsized role in creating adverse incentives associated with health plan payment systems. In response to the observed importance of the extremes of the residual spending distribution, we propose an innovative combination of risk-pooling and reinsurance targeting the predictively undercompensated group. In all three countries, this form of risk sharing substantially improves the overall fit of payments to spending. Perhaps surprisingly, by reducing the burden on diagnostic indicators to predict high payments, our proposed risk sharing policy reduces the gap between payments and spending not only for the most undercompensated individuals but also for the most overcompensated people.

Keywords: Health insurance; Risk selection; Risk adjustment; Risk sharing (search for similar items in EconPapers)
JEL-codes: I11 I13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10198-020-01227-3 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:eujhec:v:22:y:2021:i:1:d:10.1007_s10198-020-01227-3

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10198/PS2

DOI: 10.1007/s10198-020-01227-3

Access Statistics for this article

The European Journal of Health Economics is currently edited by J.-M.G.v.d. Schulenburg

More articles in The European Journal of Health Economics from Springer, Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().