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Direct versus indirect standardization in risk adjustment

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  • Schokkaert, Erik
  • Van de Voorde, Carine

Abstract

Direct and indirect standardization procedures aim at comparing differences in health or in health care expenditures between subgroups of the population after controlling for observable morbidity differences. There is a close analogy between this problem and the issue of risk adjustment in health insurance. Traditional methods of risk adjustment are analogous to indirect standardization. They are equivalent to the so-called conditional egalitarian mechanism in social choice. In general, they do not remove incentives for risk selection, even if the effect of non-morbidity variables is correctly taken into account. A method of risk adjustment based on direct standardization does remove the incentives for risk selection, but at the cost of violating a neutrality condition, stating that insurers should receive the same premium subsidy for all members of the same risk group. Direct standardization is equivalent to the egalitarian-equivalent (or proportional) mechanism in social choice. The conflict between removing incentives for risk selection and neutrality is unavoidable if the health expenditure function is not additively separable in the morbidity and efficiency variables.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 28 (2009)
Issue (Month): 2 (March)
Pages: 361-374

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Handle: RePEc:eee:jhecon:v:28:y:2009:i:2:p:361-374

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Web page: http://www.elsevier.com/locate/inca/505560

Related research

Keywords: Risk adjustment Direct standardization Indirect standardization Risk selection;

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References

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  1. Bossert, W., 1993. "Redistribution Mechanisms Based on Individual Characteristics," Working Papers 9307, University of Waterloo, Department of Economics.
  2. Erik Schokkaert & Geert Dhaene & Carine Van De Voorde, 1998. "Risk adjustment and the trade-off between efficiency and risk selection: an application of the theory of fair compensation," Health Economics, John Wiley & Sons, Ltd., vol. 7(5), pages 465-480.
  3. Marc Fleurbaey & Walter Bossert, 1996. "Redistribution and compensation (*)," Social Choice and Welfare, Springer, vol. 13(3), pages 343-355.
  4. Schokkaert, Erik & Van de Voorde, Carine, 2004. "Risk selection and the specification of the conventional risk adjustment formula," Journal of Health Economics, Elsevier, vol. 23(6), pages 1237-1259, November.
  5. Iñigo Iturbe Ormaetxe, 1995. "Redistribution And Individual Characteristics," Working Papers. Serie AD 1995-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Roland Luttens & Dirk gaer, 2007. "Lorenz Dominance and Non-welfaristic Redistribution," Social Choice and Welfare, Springer, vol. 28(2), pages 281-302, February.
  7. Fleurbaey Marc, 1995. "Three Solutions for the Compensation Problem," Journal of Economic Theory, Elsevier, vol. 65(2), pages 505-521, April.
  8. Fleurbaey, Marc, 2012. "Fairness, Responsibility, and Welfare," OUP Catalogue, Oxford University Press, number 9780199653591.
  9. FLEURBAEY, Marc & SCHOKKAERT, Erik, 2007. "Unfair inequalities in health and health care," CORE Discussion Papers 2007090, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Marc FLEURBAEY, 2006. "Health, equity and social welfare," Annales d'Economie et de Statistique, ENSAE, issue 83-84, pages 21-59.
  11. Schokkaert, Erik & Van de Voorde, Carine, 2003. "Belgium: risk adjustment and financial responsibility in a centralised system," Health Policy, Elsevier, vol. 65(1), pages 5-19, July.
  12. van de Ven, Wynand P.M.M. & Beck, Konstantin & Van de Voorde, Carine & Wasem, Jurgen & Zmora, Irit, 2007. "Risk adjustment and risk selection in Europe: 6 years later," Health Policy, Elsevier, vol. 83(2-3), pages 162-179, October.
  13. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
  14. Erik SCHOKKAERT & Carine VAN DE VOORDE, 2006. "Incentives for risk selection and omitted variables in the risk adjustment formula," Annales d'Economie et de Statistique, ENSAE, issue 83-84, pages 327-351.
  15. van de Ven, Wynand P. M. M. & Beck, Konstantin & Buchner, Florian & Chernichovsky, Dov & Gardiol, Lucien & Holly, Alberto & Lamers, Leida M. & Schokkaert, Erik & Shmueli, Amir & Spycher, Stephan & Van, 2003. "Risk adjustment and risk selection on the sickness fund insurance market in five European countries," Health Policy, Elsevier, vol. 65(1), pages 75-98, July.
  16. Hugh Gravelle & Matthew Sutton & Stephen Morris & Frank Windmeijer & Alastair Leyland & Chris Dibben & Mike Muirhead, 2003. "Modelling supply and demand influences on the use of health care: implications for deriving a needs-based capitation formula," Health Economics, John Wiley & Sons, Ltd., vol. 12(12), pages 985-1004.
  17. Hugh Gravelle, 2003. "Measuring income related inequality in health: standardisation and the partial concentration index," Health Economics, John Wiley & Sons, Ltd., vol. 12(10), pages 803-819.
  18. Van de ven, Wynand P.M.M. & Ellis, Randall P., 2000. "Risk adjustment in competitive health plan markets," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 14, pages 755-845 Elsevier.
  19. Adam Wagstaff & Eddy van Doorslaer, 2000. "Measuring and Testing for Inequity in the Delivery of Health Care," Journal of Human Resources, University of Wisconsin Press, vol. 35(4), pages 716-733.
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Cited by:
  1. Kristensen, Troels & Rose Olsen, Kim & Sortsø, Camilla & Ejersted, Charlotte & Thomsen, Janus Laust & Halling, Anders, 2013. "Resources allocation and health care needs in diabetes care in Danish GP clinics," Health Policy, Elsevier, vol. 113(1), pages 206-215.
  2. FLEURBAEY, Marc & SHOKKAERT, Erik, . "Equity in health and health care," CORE Discussion Papers RP -2373, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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