Risk selection in a regulated health insurance market: a review of the concept, possibilities and effects

Abstract

The Dutch basic health insurance is based on the principles of regulated competition. This implies that insurers and providers compete on price and quality while the regulator sets certain rules to achieve public objectives such as solidarity. Two regulatory aspects of this scheme are that insurers are not allowed to risk rate their premiums and are compensated for predictable variation in individual medical expenses (i.e., risk equalization). Research, however, indicates that the current risk equalization is imperfect, which confronts insurers and consumers with incentives for risk selection. The goal of this paper is to review the concept, possibilities and potential effects of risk selection in the Dutch basic health insurance. We conclude that the possibilities for risk selection are numerous and a potential threat to solidarity, efficiency and quality of care. Regulators should be aware that measurement of risk selection is a methodological and data-demanding challenge.

Keywords::

• efficiency
• health insurance
• regulated competition
• risk selection
• solidarity

Acknowledgements

The authors thank the following persons for their valuable comments on previous versions of this article: the employees of the NZa, in particular K Katona, R Halbersma and S van Hulten, the members of the Risk Adjustment Network, in particular V von Wyl, and three anonymous reviewers.

Financial & competing interests disclosure

The authors gratefully acknowledge the Dutch Healthcare Authority (NZa) for financing this study in part. The authors have no other relevant affiliations or financial involvement with any organization or entity with a financial interest in or financial conflict with the subject matter or materials discussed in the manuscript apart from those disclosed.

No writing assistance was utilized in the production of this manuscript.

Disclaimer

The opinions and views expressed in this paper are those of the authors and do not necessarily reflect the opinions or views of the NZa or those of the persons mentioned above. The responsibility for the content of this article fully rests with the authors.

Key issues

• • The Dutch basic health insurance is based on the principles of regulated competition.

• • Two major regulatory aspects of this scheme are premium regulation and risk equalization.

• • The current risk equalization model is imperfect resulting in incentives for risk selection.

• • We customize Newhouse’s [6] definition of risk selection to the context of regulated health insurance markets: “Actions (other than risk rating per product) by consumers and insurers with the intention and/or the effect that solidarity is not fully achieved”.

• • Solidarity is the level of (implicit) cross-subsidies from low-risk individuals (e.g., the healthy) to high-risk individuals (e.g., the chronically ill) as intended by the regulator.

• • In the Dutch basic health insurance, numerous forms of risk selection are possible (e.g., all instruments for product differentiation are instruments for risk selection).

• • Risk selection reduces solidarity if – as a result of market segmentation – low-risk and high-risk individuals concentrate in different health plans with different premiums.

• • Risk selection can reduce the efficiency of health plans since insurers may be discouraged to invest in efficiency when the expected returns on risk selection are larger.

• • Risk selection can reduce the quality of care since insurers have no incentives to organize the best care for patients who are undercompensated by the risk equalization model.

• • Measurement of risk selection is a major methodological and data-demanding challenge.

• • The absence of discernible risk selection in the past is no guarantee for the future.

• • It is impossible to prove the absence of risk selection.