Academic journal article Journal of Risk and Insurance

A Statistical Analysis of Mandatory Pooling across Health Insurers

Academic journal article Journal of Risk and Insurance

A Statistical Analysis of Mandatory Pooling across Health Insurers

Article excerpt

ABSTRACT

Risk-adjusted capitation payments from a central fund to competing health insurers or health plans form an essential feature of market-oriented healthcare reforms in many countries. If these premium-replacing payments do not adequately reflect risk, it may lead to solvency problems for plans with relatively many high-risk members and to selection against such individuals. Mandatory pooling across insurers may alleviate both problems by making the market as a whole financially responsible for high-cost or high-risk individuals. To finance the pool, every insurer would be obliged to pay, for each of its members, a uniform contribution that would depend on the projected size of the pool. The statistical analysis indicates that mandatory pooling may substantially mitigate solvency and selection problems while retaining incentives for efficiency and cost containment.

INTRODUCTION

Systems of risk-adjusted capitation payments (RACPs) to competing health insurers or health plans [1] form an essential feature of market-oriented healthcare reforms that are currently taking place in many countries. [2] The idea of RACPs is that a (government) agency finances the respective insurers for a standard benefits package on the basis of their risk profiles, so that there are little or no direct premium payments from the individual members. [3] The intention of the capitation payments is to increase incentives for efficiency and cost containment in the provision of healthcare. However, if the RACPs do not adequately reflect expected costs of insured individuals, insurers also have an incentive to select against those whose healthcare costs are predictably above their capitation payment, thus endangering another objective of healthcare reforms, that is, access to affordable health insurance for everyone. Moreover, insurers that are--possibly as a result of adverse selection (Price and Mays, 1985; Bro wne, 1992; Browne and Doerpinghaus, 1993)--confronted with a relatively unhealthy portfolio not compensated for by the RACPs may experience severe solvency problems.

Governments in countries that use RACPs currently fail to use all potentially available information in setting capitation payments. The failure of insurers to insist that they do so can be seen as a form of bounded rationality that limits solutions to other than the first best. Therefore, this article deals with second best solutions to the selection and solvency problems, which can be appropriately implemented in the political realities in the world of health insurance.

The inadequacy of currently employed RACP-formulae can be illustrated by the fact that the AAPCC system used in the U.S. to finance HMOs for Medicare members accounts for at most 1 or 2 percent of the variation among individuals in annual healthcare costs in this population (Beebe, 1992), while perhaps as much as 20 percent of this variation may be predictable (Newhouse et al., 1989; van Vliet, 1992). The consequence is that it may be very simple to identify groups of people for whom the capitation payments are either much too low or much too high. For example, van de Ven et al. (1994) concluded that in a given year the 10 percent of the population with the highest healthcare expenditures have expenses in (at least) the next four years that are on average roughly double those of the per capita expenditures within their age and sex category.

Another illustration of the inadequacy of currently employed RACP-formulae is the age/sex-based capitation payment system used as of 1993 to finance the sickness funds that are operating in the public health insurance market in the Netherlands. The costs actually incurred by some of these sickness funds in 1993 were 10 percent below their capitation payments, while for others incurred costs were up to 25 percent above capitation payments. (Both figures are for funds with more than 100,000 members.) Without the present system of substantial ex-post equalizations of profits and losses, the latter sickness funds could have already gone bankrupt. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.