Academic journal article Journal of Risk and Insurance

A Voluntary Deductible in Social Health Insurance with Risk Equalization: "Community-Rated or Risk-Rated Premium Rebate?"

Academic journal article Journal of Risk and Insurance

A Voluntary Deductible in Social Health Insurance with Risk Equalization: "Community-Rated or Risk-Rated Premium Rebate?"

Article excerpt

ABSTRACT

On January 1, 2006 a new mandatory basic health insurance will be introduced in the Netherlands. One aspect of the new scheme is that the insured can choose to have a deductible. This option should increase the individual responsibility and reduce moral hazard. In the new scheme, a risk equalization system is aimed at avoiding preferred risk selection and insolvency of insurance companies with a relatively high-risk pool. A crucial issue with respect to a voluntary deductible in this type of social health insurance is whether the premium rebate should be community rated or risk rated. The Dutch government has chosen the former, which means that the premium rebate will be independent of health status and risk. Our analysis shows that, in a situation with "accurate" risk equalization, a community-rated premium rebate could lead to an adverse selection spiral. Over time, this spiral results in none of the insured taking a deductible and thus no reduction in moral hazard.

INTRODUCTION

On January 1, 2006 a new mandatory basic health insurance will be introduced in the Netherlands for the whole population. One aspect of the new scheme is that the insured can choose to have a deductible.1 One of the issues related to the practical implementation of a voluntary deductible is whether the premium rebate should be community rated or risk rated. The Dutch government has chosen the former, implying that the premium rebate will be independent of health status and risk.

In this article we analyze the consequences of a community-rated premium rebate in combination with the risk equalization system that will be functioning in new basic health insurance. Risk equalization is aimed at avoiding subtle forms of preferred risk selection and upward premium spirals for insurers with a relatively high-risk pool. The need for risk equalization comes from the ban on premium differentiation and the obligation for insurers to accept every new applicant. As part of risk equalization, the insurers receive a compensation for the relatively high-risk individuals in their insurance pool and pay a contribution for the relatively low risks. On the one hand risk equalization among insurers can reduce incentives for cream skimming. On the other hand it could be problematic with regard to the introduction of a voluntary deductible.

Without risk equalization, the premium rebate for a deductible does not only reflect cost sharing, a reduction in moral hazard, and a reduction in administration costs, but also the effect of adverse selection by insured. Adverse selection is the phenomenon that within each risk group of insured who pay the same premium for full coverage, the relatively healthy will opt for a deductible whereas the relatively unhealthy opt for full insurance. Adverse selection thus results in market segmentation, which allows the insurer to ask different premiums from the two groups of insured. Competition will force the insurers to ask costs-based premiums. This implies that they increase the premium for the (relatively unhealthy) insured choosing full coverage and decrease the premium (i.e., further increase the premium rebate) for the insured taking the deductible. So, without a risk equalization system the difference in expected expenditures between the two groups of insured, which results from their different health status, can be reflected in the premium rebate for the deductible.

However, with an accurate risk equalization system the insurer receives a compensation for the unhealthy insured and has to pay a contribution for the healthy insured. So the difference in expected expenditures between the two groups, which is the result of their different health status, is then fully reflected in these compensations and contributions. This holds true both in the case without a voluntary deductible and in the case with a voluntary deductible. So the differences in health status between the two groups cannot be reflected in the premium rebate for a deductible. …

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