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

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.

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Notes

  1. Individuals who did not have continuous enrolment over the study period were excluded. Inclusion of deceased individuals is not useful for prediction purposes, but the exclusion of newborns may have moderately affected the generalizability of our results for the Dutch population.

  2. This weight is corrected for duplicate records in the dataset. Duplicate records were generated when merging the administrative data of 4 years due to switching behavior of individuals in prior years. Records of individuals who did not switch in year t, but who switched in 1 or more of the 3 years prior were copied (duplicates) when merging the administrative data of 4 years. These duplicate records were weighted by a value of 0.5 in the estimation of the model. There were no individuals who switched insurer more than once during 1 year (which would mean that more than two records would be generated during the merging process).

  3. “Statistics Netherlands” (“Centraal Bureau voor Statistiek”) is an autonomous Dutch agency that collects and analyzes data.

  4. The administrative data is merged with the health survey data on the individual level according to Dutch privacy protection laws and regulations.

  5. To examine to what extent percentiles of prior expenses and prior expenses continuous are ‘substitutes’, two other models were estimated; one model did not include percentiles for prior expenses and the other did not include continuous variables for prior expenses. These two models yielded adjusted R 2-values of 35.34 and 31.33 %, respectively. The adjusted R 2-value of model 6 is 35.98 %. These results indicate that continuous variables for expenses and dummy variables for percentiles of expenses both independently contribute to the predictive power of the model. Therefore, both types of variables were included in model 6.

  6. The described procedure is programmed in statistical software package SAS version 9.2.

  7. Table 3 presents descriptive statistics of the training and validation-sample. Descriptive statistics of the total sample are not presented here but can be provided on request (contact the first author).

  8. Based on an empirical analysis of Dutch administrative data from 2007, under-predictions varying from 300 Euro up to 1,400 Euro can be expected on subgroups with a relatively large proportion of institutionalized individuals [39].

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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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Correspondence to S. H. C. M. van Veen.

Appendices

Appendix 1

See Table 7.

Table 7 Definition of risk adjusters included in estimated RE-models

Appendix 2

See Table 8.

Table 8 Description of all subgroups based on more than one question and/or more answer categories of the health survey

Appendix 3

See Table 9.

Table 9 Subgroups for which the mean prediction error in year t was already not statistically significantly different from zero for model 1, 2, 3, or 4. In this study, the prediction year t is 2009. The column of total expenses presents the corrected total expenses. Total expenses and predicted expenses in the sample with health survey information were corrected in such a way that the average MPE on the total survey sample is zero. This was done to test the statistical significance of the MPEs from zero. By doing so, the column with total expenses in year t minus the column with the MPEs of model 1 results into the same number for each group, namely total average expenses in year t (1,689 Euro)

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van Veen, S.H.C.M., van Kleef, R.C., van de Ven, W.P.M.M. et al. Improving the prediction model used in risk equalization: cost and diagnostic information from multiple prior years. Eur J Health Econ 16, 201–218 (2015). https://doi.org/10.1007/s10198-014-0567-7

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  • DOI: https://doi.org/10.1007/s10198-014-0567-7

Keywords

  • Competitive health care schemes
  • Health insurance
  • Risk equalization
  • Predictive performance

JEL Classification

  • I13
  • I18