The goal of risk equalization in regulated competitive health insurance markets

Wynand Ven (), Gerrit Hamstra, Richard Kleef, Mieke Reuser and Piet Stam
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Wynand Ven: Erasmus University Rotterdam
Gerrit Hamstra: Equalis Strategy and Modeling
Richard Kleef: Erasmus University Rotterdam
Mieke Reuser: Erasmus University Rotterdam
Piet Stam: Equalis Strategy and Modeling

The European Journal of Health Economics, 2023, vol. 24, issue 1, No 10, 123 pages

Abstract: 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.

Keywords: Risk equalization; Efficiency; Level playing field; Risk selection (search for similar items in EconPapers)
JEL-codes: G18 I11 I13 I18 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10198-022-01457-7

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