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The European Journal of Health Economics

, Volume 16, Issue 2, pp 201–218 | Cite as

Improving the prediction model used in risk equalization: cost and diagnostic information from multiple prior years

  • S. H. C. M. van VeenEmail author
  • R. C. van Kleef
  • W. P. M. M. van de Ven
  • R. C. J. A. van Vliet
Original Paper

Abstract

Currently-used risk-equalization models do not adequately compensate insurers for predictable differences in individuals’ health care expenses. Consequently, insurers face incentives for risk rating and risk selection, both of which jeopardize affordability of coverage, accessibility to health care, and quality of care. This study explores to what extent the predictive performance of the prediction model used in risk equalization can be improved by using additional administrative information on costs and diagnoses from three prior years. We analyze data from 13.8 million individuals in the Netherlands in the period 2006–2009. First, we show that there is potential for improving models’ predictive performance at both the population and subgroup level by extending them with risk adjusters based on cost and/or diagnostic information from multiple prior years. Second, we show that even these extended models do not adequately compensate insurers. By using these extended models incentives for risk rating and risk selection can be reduced substantially but not removed completely. The extent to which risk-equalization models can be improved in practice may differ across countries, depending on the availability of data, the method chosen to calculate risk-adjusted payments, the value judgment by the regulator about risk factors for which the model should and should not compensate insurers, and the trade-off between risk selection and efficiency.

Keywords

Competitive health care schemes Health insurance Risk equalization Predictive performance 

JEL Classification

I13 I18 

Notes

Acknowledgments

The authors gratefully acknowledge the Dutch Ministry of Health, Welfare and Sport and the national association of Dutch health insurers (“Zorgverzekeraars Nederland”) for their permission to use administrative data for this study. In addition, we gratefully thank “Statistics Netherlands” (“Centraal Bureau voor Statistiek”) for providing access to the health survey data. For their helpful comments on an earlier draft, we would gratefully thank the members of the Risk Adjustment Network and the two anonymous referees. The opinions in this article are those of the authors and do not necessarily reflect those of the above-mentioned organisations and individuals.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  • S. H. C. M. van Veen
    • 1
    Email author
  • R. C. van Kleef
    • 1
  • W. P. M. M. van de Ven
    • 1
  • R. C. J. A. van Vliet
    • 1
  1. 1.Institute Health Policy and ManagementErasmus University RotterdamRotterdamThe Netherlands

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