Risk Equalization in an Individual Health Insurance Market: The Only Escape from the Tradeoff Between Affordability, Efficiency and Selection

Publication Date: January 2007

Publisher: Center for Advanced Study in the Behavioral Sciences

Author(s): W.P.M.M. van de Ven; F.T. Schut

Research Area: Health

Type: White Paper

Abstract:

Along with efficiency and selection, affordability of health insurance for high-risk individuals in the insurance market is a central concern. Subsidies have been used to address the affordability issue.



In this paper, the authors reviewed different forms of subsidies and highlighted the tradeoffs of the various forms. Additionally, the health insurance experience of the Netherlands was presented as a case study.



Key Findings:



Using risk-adjusted subsidies instead of premium-based subsidies does not distort competition in the insurance market and is a more ideal approach. Countries applying risk-adjusted subsidies have chosen risk equalization for insurers.
Health care reform in the Netherlands is characterized by consistent implementation of Enthoven's (1978) model of Managed Competition. Government regulates prices, capacity, and infrastructure and provides subsidies to two-thirds of Dutch households. Supplemental health insurance is also made available.
As premium subsidies are adjusted for risk factors, tradeoffs between affordability, efficiency, and selection decrease in severity and fewer complementary strategies are needed. Good risk equalization allows the avoidance of tradeoffs.Investing in risk equalization should lead to more affordable individual health insurance in competitive insurance markets.