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The European Journal of Health Economics
Published in: The European Journal of Health Economics 2/2017

Open Access 01-03-2017 | Original Paper

How can the regulator show evidence of (no) risk selection in health insurance markets? Conceptual framework and empirical evidence

Authors: Wynand P. M. M. van de Ven, René C. J. A. van Vliet, Richard C. van Kleef

Published in: The European Journal of Health Economics | Issue 2/2017

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Abstract

If consumers have a choice of health plan, risk selection is often a serious problem (e.g., as in Germany, Israel, the Netherlands, the United States of America, and Switzerland). Risk selection may threaten the quality of care for chronically ill people, and may reduce the affordability and efficiency of healthcare. Therefore, an important question is: how can the regulator show evidence of (no) risk selection? Although this seems easy, showing such evidence is not straightforward. The novelty of this paper is two-fold. First, we provide a conceptual framework for showing evidence of risk selection in competitive health insurance markets. It is not easy to disentangle risk selection and the insurers’ efficiency. We suggest two methods to measure risk selection that are not biased by the insurers’ efficiency. Because these measures underestimate the true risk selection, we also provide a list of signals of selection that can be measured and that, in particular in combination, can show evidence of risk selection. It is impossible to show the absence of risk selection. Second, we empirically measure risk selection among the switchers, taking into account the insurers’ efficiency. Based on 2-year administrative data on healthcare expenses and risk characteristics of nearly all individuals with basic health insurance in the Netherlands (N > 16 million) we find significant risk selection for most health insurers. This is the first publication of hard empirical evidence of risk selection in the Dutch health insurance market.
Footnotes
1
There may be some risk selection if the costs of further premium differentiation are too high.
 
2
Additional subsidies, such as income-related subsidies to low-income people, are not relevant for our discussion of risk selection.
 
3
In the USA's Medicare Advantage system, the risk equalization payment equals a certain percentage of the predicted expenses in traditional Medicare.
 
4
In the Netherlands, p = 0 for children up to the age of 18; in Switzerland, children up to the age of 18 are exempted from risk equalization.
 
5
In Israel, insurers are not allowed to charge a premium. Dutch insurers are not allowed to charge a premium to children. In Switzerland, there are different community-rated premiums for the age groups 0–18, 19–25, and 26 + per insurer per canton. In the health insurance exchanges in the USA, the premium may be conditioned on age (1:3), smoking (1:1.5), family size, and geography, but not on other risk characteristics.
 
6
Nevertheless, one person can be sufficient for the existence of risk selection, e.g., an insurer’s action with the goal that an insured who is expected to be undercompensated will disenroll.
 
7
The insurers’ average residual expenses of their insured could be interpreted as (a proxy for) the financial result they would achieve under identical premiums and identical administrative costs (including additional revenues, e.g., due to interest).
 
8
The average residual expenses for selected groups of insured in the population (e.g., those with the worst health status) indicate that, with a certain level of statistical significance, there are incentives for risk selection (because some selected groups are over- or undercompensated). For an example, see Table 2.
 
9
The importance of disentangling the effects of selection and efficiency is nicely illustrated by McGuire et al. [7] as follows: “Ellis and McGuire [4] measure predictability, predictiveness, and the consequent incentives to ration services among plans competing in Medicare using data from traditional Medicare (not the managed care component for which data were not available). Cao and McGuire [2] in Medicare and Eggleston and Bir [3] in employer-based insurance find patterns of spending on various services consistent with service-level selection among competing at-risk plans. Ellis et al. [5] rank services according to incentives to undersupply them. Consistent with service-level selection, they show that HMO-type plans tend to underspend on services (in relation to the average) just as the selection index predicts. This pattern of spending is not observed among enrollees in unmanaged plans. An alternative interpretation, however, is that HMO plans are better at managing diseases that tend to be predictable, i.e., chronic illnesses where the ability to manage care is more feasible, and so reduce spending more for these diseases than for others in relation to less-managed plans. This latter interpretation is supported by the findings of Newhouse et al. [14].”
 
10
The insured may differ in tastes or in their preference for efficiency. For example, some insured may (ceteris paribus) have a low propensity to use healthcare services or prefer to make use of healthcare services in an efficient way, while other consumers may have opposite preferences.
 
11
We implicitly assume that (1) the regulator does not want to give lower equalization payments for insured who ceteris paribus prefer to make use of health care services in an efficient way; and that (2) the medical expenses function is additively separable in a set of risk factors for which the regulator wants to compensate the insurers via the risk equalization and a set of risk factors for which this is not the case (such as the ‘efficiency at the insured level’). If the second assumption is not fulfilled, it is impossible to get a precise estimate of risk selection because efficiency and risk selection cannot be disentangled [16].
 
12
A successful example of this type of risk selection is the building of so-called ‘conglomerates of insurers’ by Swiss insurers. In 2007, the most successfully risk-selecting conglomerate in Switzerland had 14 different insurers with very different premiums ranging from very cheap to rather expensive, and the salesmen of this conglomerate were very successful in ‘channeling enrollees to the insurer with a premium that best corresponded to their expected expenses’ [22]. Despite the community rating per insurer, the cross-subsidies as intended by the regulator are then not achieved.
 
13
Studies providing empirical evidence of signals of risk selection are e.g., Shmueli and Nissan-Engelcin [19], Mehrotra et al. [8], Bauhoff [1], Grunow and Nuscheler [6], Riley et al. [15], McWilliams et al. [9], and Newhouse et al. [13]. For a list of anecdotal evidence of risk selection, see e.g., Van de Ven et al. [21, 22].
 
14
For a list of such tools, see e.g., Van Kleef et al. [25] and Van de Ven et al. [23].
 
15
This type of selection could be easily avoided by prohibiting such types of rebates. However, this would reduce the consumers’ option to form powerful consumer groups that can effectively negotiate with the insurers.
 
16
This also implies that it is impossible to show the absence of incentives for risk selection.
 
17
To verify that the new enrollees and those who disenrolled were not disproportionally distributed among the other insurers, we performed two calculations. We calculated for each insurer the weighted average of the financial results (2008-data) of the 24 insurers where its new enrollees came from. This measure ranged among the 25 insurers from −9 to +6 euro (with one exception: −29 euro) and was never statistically significant. Similarly, the weighted averages of the financial results (2009-data) of the 24 insurers to which the disenrollees switched ranged from −15 to +16 euro and were never statistically significant.
 
18
For potential actions to do so, see e.g., Van de Ven and Ellis [20].
 
19
Achmea (2011), Letter of Achmea to the members of Parliament, 7 September 2011 (obtainable from the Clerk of Parliament or from the first author); and speech by Ab Klink, member of the Board of VGZ at the 14th Clingendael European Health Forum, The Hague, 26 March 2014, see https://​www.​youtube.​com/​watch?​v=​EPeXKppJeUE, and the letter of Zorgverzekeraars Nederland sent to the Minister of Health, 18 July 2014 (see ZN-Journaal nr. 30–31, www.​zn.​nl).
 
20
After finishing our study (in 2014), the Dutch regulator performed a similar analysis as we did for several consecutive years and found similar results (as in Table 4), which were quite stable over time. The regulator also announced plans to do the same analysis at the level of health plans (rather than insurers) and also to use a selection of the ‘list of signals of selection’ as mentioned in this paper. See Nederlandse Zorgautoriteit [11].
 
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Metadata
Title
How can the regulator show evidence of (no) risk selection in health insurance markets? Conceptual framework and empirical evidence
Authors
Wynand P. M. M. van de Ven
René C. J. A. van Vliet
Richard C. van Kleef
Publication date
01-03-2017
Publisher
Springer Berlin Heidelberg
Published in
The European Journal of Health Economics / Issue 2/2017
Print ISSN: 1618-7598
Electronic ISSN: 1618-7601
DOI
https://doi.org/10.1007/s10198-016-0764-7

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