Access to coverage for high-risks in a competitive individual health insurance market: via premium rate restrictions or risk-adjusted premium subsidies?

The Changing Role of Government in Financing Health Care: An International Perspective

“…They can provide subsidies to individuals-cash transfers, vouchers, tax-favored treatment, tax credits, etc.-to enable them to purchase high-cost insurance. Van de Ven and Schut (2011) note that premium subsidies are unlikely to be optimal for three reasons: they reduce the incentive for efficient purchasing of insurance by high-risk individuals; they encourage excess purchase of insurance and the resulting moral hazard effects (Zweifel and Manning 2000); and they may create a misallocation of subsides if the magnitude of the premium is based on elements that are not relevant for the level of the subsidy (such as differences in efficiency among health insurers or regional differences in prices). In contrast, risk-adjusted subsidies, where Where subsidies are provided by government to the insurer, individuals are then charged a community-rated contribution for insurance that is not based on their expected costs.…”

“…In contrast, risk-adjusted subsidies, where Where subsidies are provided by government to the insurer, individuals are then charged a community-rated contribution for insurance that is not based on their expected costs. Van de Ven and Schut (2011) refer to subsidies provided to insurers as risk equalization and note that these are far more common in practice than subsidies provided to individuals, due to lower transaction costs. The ultimate success of these risk adjustment mechanisms depends on ability to determine risk (van de Ven et al 2000).…”

“…Van de Ven and Schut (2011) refer to subsidies provided to insurers as risk equalization and note that these are far more common in practice than subsidies provided to individuals, due to lower transaction costs. The ultimate success of these risk adjustment mechanisms depends on ability to determine risk (van de Ven et al 2000). Glazer and McGuire (2000) show that in an optimal risk adjustment framework, prices paid to insurers should not only reflect differences in costs across patients, but also provide incentives for higher quality care for the types of patients likely to enroll in the plan.…”

“…The European health systems with competitive health insurance featured in this review-Germany and Switzerland-have significantly improved their risk equalization schemes in the last ten years and now have relatively sophisticated formulas that include health-based risk adjusters (Thomson et al 2013). In spite of this, insurers' incentives to select risks can be substantial and there continues to be (largely circumstantial) evidence of risk selection (van de Ven et al 2007) and hence, potential inefficiencies in risk pooling. Nuscheler and Knaus (2005) investigate the effects of the 1996 German reforms that allowed for greater competition among sickness funds to test for evidence of risk selection by company-based sickness funds.…”

Hybrid Risk Adjustment for Pharmaceutical Benefits

“…Differently, if we include only ex post individual information in the payment formula, we reduce the risk assumed by health plans, and therefore the incentives for risk selection, although also the incentives for efficiency. When those models use ex post information on cost instead of other indicators of need, they belong to what has been called in the literature a risk sharing formula [30,31,35], while when they use ex post information on diagnosis, they present a concurrent risk adjustment scheme [34].…”