R.C. van Kleef

Risk equalization and voluntary deductibles: A complex interaction

The presence of voluntary deductibles in the Swiss and Dutch mandatory health insurance has important implications for the respective risk equalization systems. In a theoretical analysis, we discuss the consequences of equalizing three types of expenditures: the net claims that are reimbursed by the insurer, the out-of-pocket expenditures and the expenditure savings due to moral hazard reduction. Equalizing only the net claims, as done in Switzerland, creates incentives for cream skimming and prevents insurers from incorporating out-of-pocket expenditures and moral hazard reductions into their premium structure. In an empirical analysis, we examine the effect of self-selection and conclude that the Swiss and Dutch risk equalization systems do not fully adjust for differences in health status between those who choose a deductible and those who do not. We discuss how this may lead to incentives for cream skimming and to a reduction of cross-subsidies from healthy to unhealthy individuals compared to a situation without voluntary deductibles.

Shifted Deductibles for High Risks: More Effective in Reducing Moral Hazard than Traditional Deductibles

In health insurance, a traditional deductible (i.e. with a deductible range [0,d]) is in theory not effective in reducing moral hazard for individuals who know (ex-ante) that their expenditures will exceed the deductible amount d, e.g. those with a chronic disease. To increase the effectiveness, this paper proposes to shift the deductible range to [s(i),s(i)+d], with starting point s(i) depending on relevant risk characteristics of individual i. In an empirical illustration we assume the optimal shift to be such that the variance in out-of-pocket expenditures is maximized. Results indicate that for the 10-percent highest risks in our data the optimal starting point of a euro1000-deductible is to be found (far) beyond euro1200, which corresponds with a deductible range of [1200,2200] or further. We conclude that, compared to traditional deductibles, shifted deductibles with a risk-adjusted starting point lower out-of-pocket expenditures and may further reduce moral hazard.

Is There One Measure-of-Fit That Fits All? A Taxonomy and Review of Measures-of-Fit for Risk-Equalization Models

This study provides a taxonomy of measures-of-fit that have been used for evaluating risk-equalization models since 2000 and discusses important properties of these measures, including variations in analytic method. It is important to consider the properties of measures-of-fit and variations in analytic method, because they influence the outcomes of evaluations that eventually serve as a basis for policymaking. Analysis of 81 eligible studies resulted in the identification of 71 unique measures that were divided into 3 categories based on treatment of the prediction error: measured based on squared errors, untransformed errors, and absolute errors. We conclude that no single measure-of-fit is best across situations. The choice of a measure depends on preferences about the treatment of the prediction error and the analytic method. If the objective is measuring financial incentives for risk selection, the only adequate evaluation method is to assess the predictive performance for non-random groups.This study provides a taxonomy of measures-of-fit that have been used for evaluating risk-equalization models since 2000 and discusses important properties of these measures, including variations in analytic method. It is important to consider the properties of measures-of-fit and variations in analytic method, because they influence the outcomes of evaluations that eventually serve as a basis for policymaking. Analysis of 81 eligible studies resulted in the identification of 71 unique measures that were divided into 3 categories based on treatment of the prediction error: measured based on squared errors, untransformed errors, and absolute errors. We conclude that no single measure-of-fit is best across situations. The choice of a measure depends on preferences about the treatment of the prediction error and the analytic method. If the objective is measuring financial incentives for risk selection, the only adequate evaluation method is to assess the predictive performance for non-random groups.

Histology of joint inflammation induced in rats by cell wall fragments of the anaerobic intestinal bacterium Eubacterium aerofaciens

SummaryTo study the arthropathic properties of human intestinal bacteria, cell wall fragments (CWF) of the anaerobic bowel bacterium Eubacterium aerofaciens were injected intraperitoneally (i.p.) in arthritis-susceptible Lewis rats. Rat paw joints were subsequently studied for histopathological changes. A persisting synovitis accompanied by marginal erosions of cartilage and bone and a marked periosteal apposition of new bone tissue were the main features of the polyarthritis induced. These results are discussed in relation to streptococcal cell wall induced arthritis and compared with histopathological findings in rheumatoid arthritis (RA) in man.

Diagnoses-based cost groups in the Dutch risk-equalization model: the effects of including outpatient diagnoses.

BACKGROUND The Dutch basic health-insurance scheme for curative care includes a risk equalization model (RE-model) to compensate competing health insurers for the predictable high costs of people in poor health. Since 2004, this RE-model includes the so-called Diagnoses-based Cost Groups (DCGs) as a risk adjuster. Until 2013, these DCGs have been mainly based on diagnoses from inpatient hospital treatment. OBJECTIVES This paper examines (1) to what extent the Dutch RE-model can be improved by extending the inpatient DCGs with diagnoses from outpatient hospital treatment and (2) how to treat outpatient diagnoses relative to their corresponding inpatient diagnoses. METHOD Based on individual-level administrative costs we estimate the Dutch RE-model with three different DCG modalities. Using individual-level survey information from a prior year we examine the outcomes of these modalities for different groups of people in poor health. CONCLUSIONS We find that extending DCGs with outpatient diagnoses has hardly any effect on the R-squared of the RE-model, but reduces the undercompensation for people with a chronic condition by about 8%. With respect to incentives, it may be preferable to make no distinction between corresponding inpatient and outpatient diagnoses in the DCG-classification, although this will be at the expense of the predictive accuracy of the RE-model.

Does risk equalization reduce the viability of voluntary deductibles

Theoretically, a risk avers consumer takes a deductible if the premium rebate (far) exceeds his/her expected out-of-pocket expenditures. In the absence of risk equalization, insurers are able to offer high rebates because those who select into a deductible plan have below-average expenses. This paper shows that, for high deductibles, such rebates cannot be offered if risk equalization would “perfectly” adjust for the effect of self selection. Since the main goal of user charges is to reduce moral hazard, some effect of self selection on the premium rebate can be justified to increase the viability of voluntary deductibles.

How profitable is a voluntary deductible in health insurance for the consumer

To counteract moral hazard in health insurance, insured can be offered a voluntary deductible (VD) in return for a premium rebate. In the Dutch mandatory basic health insurance however, only 11 per cent of the insured opted for a VD in 2014. Several determinants could affect the decision to opt for a VD. This paper examines one of these determinants: the financial profitability. A VD is profitable for the consumer if the out-of-pocket expenses do not exceed the offered premium rebate. The empirical analyses, based upon individual-level data on costs and characteristics of over 800,000 Dutch insured, show that a VD of €500 on top of the mandatory deductible of €360 would have been financially profitable for 48 per cent of the Dutch insured given the average premium rebate of € 240 in 2014. If the whole population had a VD, most insured would obtain either the maximum loss (44 per cent) or the maximum gain (41 per cent). A VD is profitable for males, young insured, healthy insured and insured with few healthcare expenses in the past. To further reduce moral hazard, the following strategies can be used to increase the number of insured opting for a VD: provide insured with information regarding the VD and introduce a shifted deductible.

The demand for health insurance and behavioural economics.

A vast amount of traditional economic literature [e.g. 2, 13, 20] describes the advantages and disadvantages of taking out health insurance. The major advantage of insurance is the reduction of uncertainty regarding financial losses [12]. The welfare gain from this uncertainty reduction depends on the individual’s degree of risk aversion [14], which is affected by the presence of background risks (i.e. risks that cannot be avoided or insured against, such as labour income risks). Several studies show that background risks to wealth makes risk averse individuals behave in a more risk averse way with respect to any other independent risk [e.g. 5]. This concept is called risk vulnerability [8], and causes insured to reduce their exposure to avoidable risks, for instance by increasing their insurance demand [9]. Another advantage of health insurance is that it provides access to healthcare services that would otherwise be unaffordable [12]. The disadvantages of insurance are moral hazard, the loading fee and the transaction costs related to purchasing the insurance and handling the claims. The literature shows that full insurance is far from optimal and that a mix between coverage and cost sharing is preferred. Optimal designs of health insurance (1) protect individuals against unpredictable high financial risks, (2) provide access to otherwise unaffordable healthcare services, (3) include first-dollar cost sharing, and (4) incorporate individual caps on out-of-pocket expenses [4] (see Table 1). In practice, however, insurance design does not always comply with these principles. An obvious example concerns the Dutch supplementary health insurance (SHI). As we will explain below, the Dutch SHI substantially deviates from the optimal design. It is therefore surprising to observe the popularity of this scheme: 84 %of theDutch insured took out SHI in 2015. This intriguing paradox suggests that additional aspects––compared to those mentioned in the traditional economic literature––may play a role in the demand for health insurance. After a short description of the Dutch SHI, we will discuss a series of potential explanations for the high uptake of ‘‘suboptimal’’ insurance stemming from key insights described in the behavioural economic literature. Dutch insured can buy a SHI for healthcare services not (or partially) covered by mandatory basic health insurance (BHI), such as dental care, physiotherapy, durable medical equipment, alternative medicines, pharmaceuticals, care consumed in a foreign country, orthodontics and maternity care. The Dutch SHI market is a free market, which means that insurers are free to determine the premiums, coverage and cost sharing arrangements. The risk reduction resulting from the Dutch SHI is limited because most healthcare services covered do not involve large losses, and because coverage limits are applied (see Table 1). The latter implies that, after the limit is reached, all expenses have to be paid out-of-pocket by the insured, which––in case of care consumed in a foreign country or dental care after an accident, for example––could lead to substantial out-ofpocket expenses. Next to the limited risk reduction, the Dutch SHI mostly provides access to already affordable healthcare services such as dental check-ups and regular consultations with the physiotherapist. These characteristics suggest that the consumers’ welfare gain from Dutch SHI may be limited. At the same time the consumers’ & K. P. M. van Winssen vanwinssen@bmg.eur.nl

Examining unpriced risk heterogeneity in the Dutch health insurance market

A major challenge in regulated health insurance markets is to mitigate risk selection potential. Risk selection can occur in the presence of unpriced risk heterogeneity, which refers to predictable variation in health care spending not reflected in either premiums by insurers or risk equalization payments. This paper examines unpriced risk heterogeneity within risk groups distinguished by the sophisticated Dutch risk equalization model of 2016. Our strategy is to combine the administrative dataset used for estimation of the risk equalization model (n = 16.9 million) with information derived from a large health survey (n = 387k). The survey information allows for explaining and predicting residual spending of the risk equalization model. Based on the predicted residual spending, two metrics are used to indicate unpriced risk heterogeneity at the individual level and at the level of certain (risk) groups: the correlation coefficient between residual spending and predicted residual spending, and the mean absolute value of predicted residual spending. The analyses yield three main findings: (1) the health survey information is able to explain some residual spending of the risk equalization model, (2) unpriced risk heterogeneity exists both in morbidity and in non-morbidity groups, and (3) unpriced risk heterogeneity increases with predicted spending by the risk equalization model. These findings imply that the sophisticated Dutch risk equalization model does not completely remove unpriced risk heterogeneity. Further improvement of the model should focus on broadening and refining the current set of morbidity-based risk adjusters.

Can premium differentiation counteract adverse selection in the Dutch supplementary health insurance? A simulation study

Most health insurers in the Netherlands apply community-rating and open enrolment for supplementary health insurance, although it is offered at a free market. Theoretically, this should result in adverse selection. There are four indications that adverse selection indeed has started to occur on the Dutch supplementary insurance market. The goal of this paper is to analyze whether premium differentiation would be able to counteract adverse selection. We do this by simulating the uptake and premium development of supplementary insurance over 25 years using data on healthcare expenses and background characteristics from 110,261 insured. For the simulation of adverse selection, it is assumed that only insured for whom supplementary insurance is expected not to be beneficial will consider opting out of the insurance. Therefore, we calculate for each insured the financial profitability (by making assumptions about the consumer’s expected claims and the premium set by the insurer), the individual’s risk attitude and the probability to opt out or opt in. The simulation results show that adverse selection might result in a substantial decline in insurance uptake. Additionally, the simulations show that if insurers were to differentiate their premium to 28 age and gender groups, adverse selection could be modestly counteracted. Finally, this paper shows that if insurers would apply highly refined risk-rating, adverse selection for this type of supplementary insurance could be counteracted completely.