1. Erasmus Universiteit Rotterdam 1 brussel Risk adjustment and consumer choice of sickness fund in five European countries: solidarity, efficiency and quality of care Wynand P.M.M. van de Ven Professor of Health Insurance Erasmus University Rotterdam Email: vandeven@bmg.eur.nlvandeven@bmg.eur.nl

2. Erasmus Universiteit Rotterdam 2 brussel Five countries Belgium Germany Israel The Netherlands Switzerland

3. Erasmus Universiteit Rotterdam 3 brussel Recent development 1.Enlarging the consumer choice of sickness fund; 2.Increasing the financial responsibility of sickness funds.

4. Erasmus Universiteit Rotterdam 4 brussel Rationale The rationale is to stimulate the sickness funds to improve efficiency in health care production and to respond to consumers’ preferences.

5. Erasmus Universiteit Rotterdam 5 brussel Common problem In case of imperfect risk adjustment the sickness funds have financial incentives to select the predictably profitable consumers. This selection and the resulting market segmentation may have serious adverse effects.

6. Erasmus Universiteit Rotterdam 6 brussel Agenda: 1.Conceptual framework and rationale of good risk adjustment; 2.The practice in five European countries; 3.Discussion.

7. Erasmus Universiteit Rotterdam 7 brussel Great challenge How to combine solidarity and consumer choice of sickness fund?

8. Erasmus Universiteit Rotterdam 8 brussel Consumer Sickness Fund Premium Contribution Solidarity contribution Premium subsidy Solidarity Fund

9. Erasmus Universiteit Rotterdam 9 brussel Consumer Sickness Fund Premium subsidy Solidarity Fund Solidarity contribution Contribution* * contribution = solidarity contribution plus premium contribution

10. Erasmus Universiteit Rotterdam 10 brussel Policy relevance of risk adjustment The policy relevance of risk adjustment is that, in theory, perfectly risk-adjusted premium subsidies may combine solidarity and a competitive health insurance market. In practice, however, perfect risk adjustment is still a long way off.

11. Erasmus Universiteit Rotterdam 11 brussel Premium rate restrictions For reasons of solidarity government imposes restrictions on the variation of the premium contributions. These restrictions create incentives for selection.

12. Erasmus Universiteit Rotterdam 12 brussel Selection Actions (not including risk-rated pricing by insurers) by insurers and consumers to exploit unpriced risk heterogeneity and break pooling arrangements; The outcome of these actions.

13. Erasmus Universiteit Rotterdam 13 brussel How to prevent selection? Mandatory health insurance; open enrolment requirement; Standardized benefits package; Additional procompetitive regulation; Adequate risk adjustment (or risk equalization); Risk sharing between the sponsor and the insurers.

14. Erasmus Universiteit Rotterdam 14 brussel Are age and gender sufficient? If the RAPS are only based on age and gender, then an insurer will, roughly speaking, make: –a predictable loss of about 100% for the 10% of the population with the worst health status; –a predictable profit of about 25 to 40% for the healthiest half of the population.

15. Erasmus Universiteit Rotterdam 15 brussel Predictable cost variation within an age-gender group The five percent individuals with the highest health care expenditures in a year can be predicted to have total expenditures over the next four years that are twice the average expenditures within their age-gender group.

16. Erasmus Universiteit Rotterdam 16 brussel Possible forms of c.s. at enrollment: 1.Contracting only with selected providers; 2.Design of benefits package; 3.Insurance agent; 4.Package deal; 5.Selective advertising.

17. Erasmus Universiteit Rotterdam 17 brussel Possible forms of c.s. at disenrollment 1.Low quality of care; 2.Design of benefits package; 3.Poor services; 4.Golden hand shake.

18. Erasmus Universiteit Rotterdam 18 brussel Adverse effects of cream skimming 1.A disincentive to be responsive to the preferences of high-risk consumers; 2.Cream skimming is more attractive than improving efficiency.

19. Erasmus Universiteit Rotterdam 19 brussel Prevention of cream skimming Two major strategies to reduce cream skimming: 1.Risk adjustment (or: risk equalisation); 2.Risk sharing.

20. Erasmus Universiteit Rotterdam 20 brussel Criteria for choosing among risk adjustment models Appropriateness of incentives: –No incentives for selection; –Incentives for efficiency; –Incentives for health-improving activities; –No incentives to distort information to the sponsor. Fairness: –No compensation for N-type risk factors; –No compensation for risk factors which reflect underutilization; –Predictive value. Feasibility.

21. Erasmus Universiteit Rotterdam 21 brussel Risk-adjusters Prior utilization combined with diagnostic information; Disability; Self-reported chronic conditions; Consumer-choice of a high- or low-option plan.

22. Erasmus Universiteit Rotterdam 22 brussel Prior utilization: Best single predictor of an individual’s future health expenditures; Two major criticisms: 1.No regard is paid to the appropriateness of the care; 2.Average relationship between prior use and subsequent cost. Solution: Diagnostic information

23. Erasmus Universiteit Rotterdam 23 brussel The practice of risk-adjustment and risk-sharing in 5 countries

24. Erasmus Universiteit Rotterdam 24 brussel Implementation problems Implementation of Risk Adjustment in practice: very complex! Lack of data at individual level; Lack of data for health adjustment; Appropriate incentives: often not used as a relevant criterion.

25. Erasmus Universiteit Rotterdam 25 brussel Switchers Switchers: 1-5 percent of the population, per year; Most switchers are young and healthy; risk adjusters: –age: implemented in all five countries; –health: not (yet) implemented in any of the five countries; Small insurers are winners, large insurers are losers.

26. Erasmus Universiteit Rotterdam 26 brussel Is selection a problem?

27. Erasmus Universiteit Rotterdam 27 brussel Selection activities, given open enrollment Via supplementary health insurance; Selective advertising; Virtual (internet) sickness fund; Employer-related (group) sickness fund; Via limited provider plans (HMOs/PPOs).

28. Erasmus Universiteit Rotterdam 28 brussel Conclusion Good risk adjustment (or ex-ante risk equalization) is a necessary condition to reap the fruits of giving the consumers a choice of sickness fund.

29. Erasmus Universiteit Rotterdam 29 brussel Rationale of consumer choice of sickness fund In the literature “consumer choice of sickness fund”is associated with the model that government allows individual sickness funds to be a prudent buyer of care, or to “manage the care”.

30. Erasmus Universiteit Rotterdam 30 brussel Politicians must make an explicit choice Who is the third-party purchaser of care: 1.Government, or a cartel of sickness funds; 2.Individual risk-bearing sickness funds. In the first option it is hard to think of any rational argument for giving consumers a periodic choice among risk-bearing sickness funds.