W.P.M.M. van de Ven

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.

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

Risk Equalization and Risk Adjustment, the European Perspective

Several European countries have chosen to have a competitive social health insurance market. A major challenge for these countries is to organize the cross subsidies from the low risks to the high risks without creating incentives for inefficiency or for risk selection. In theory good risk equalization is an effective strategy. Because in practice the implementation of good risk equalization is complex, policymakers are confronted with a trade-off between affordability, efficiency, and the adverse effects of risk selection. Although most of the experience in Europe is with risk-adjusted payments to insurers, the relevance of risk-adjusted payments to providers is strongly increasing.

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.

Hoe kan de Nederlandse Zorgautoriteit (NZa) risicoselectie op de zorgverzekeringsmarkt aantonen en meten

Verzekerden kunnen elk jaar overstappen naar een andere zorgverzekering. Zorgverzekeraars moeten iedereen accepteren voor dezelfde premie per polis. De risicoverevening compenseert zorgverzekeraars vooraf voor voorspelbare, gezondheidgerelateerde kostenverschillen tussen verzekerden. Omdat deze verevening nog niet perfect is, bestaat ruimte voor risicoselectie door verzekerden en verzekeraars. Risicoselectie kan schadelijk zijn voor de publieke belangen kwaliteit, toegankelijkheid en betaalbaarheid van de zorg. Dit maakt risicoselectie een belangrijk aandachtspunt voor de Nederlandse Zorgautoriteit (NZa) die goedwerkende zorgmarkten maakt en bewaakt, en toezicht houdt op de publieke belangen. Tegen deze achtergrond staat de volgende vraag in dit artikel centraal: “Hoe kan de NZa risicoselectie op de zorgverzekeringsmarkt aantonen en meten?” Het precies meten en aantonen van (alle vormen van) risicoselectie blijkt niet eenvoudig. Dit artikel doet aanbevelingen voor een statistische en kwalitatieve benadering van dit meetprobleem. Naast empirische meetmethoden wordt een groot aantal (sterke) signalen genoemd die de NZa kan meten en die elk, en zeker in samenhang, duiden op risicoselectie. Dit biedt de NZa gereedschap om invulling te geven aan haar toezicht- en reguleringstaken betreffende risicoselectie. Het verdient aanbeveling na te gaan of de NZa over voldoende handhavingsinstrumenten beschikt om op te treden tegen ongewenste risicoselectie. Zo nodig moet de wetgever het wettelijke instrumentarium van de NZa uitbreiden.