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Risk adjustment and the trade-off between efficiency and risk selection: an application of the theory of fair compensation

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Author Info
Erik Schokkaert (Center for Economic Studies, KULeuven, Belgium)
Geert Dhaene (Université de Mons-Hainaut, Belgium)
Carine Van De Voorde (Center for Economic Studies, KULeuven, Belgium)

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Abstract

We exploit the similarity between the problem of risk adjustment with prospective reimbursement schemes in the health care sector and the problem of fair compensation analysed in the social choice literature. The starting point is the distinction between two sets of variables in the explanation of medical expenditures: those for which the insurers (or the providers) can be held responsible, and those for which they have to be compensated. Using this partitioning the objectives of cost-efficiency and no risk selection can be expressed in terms of two simple axioms. If the medical expenditure function is additively separable in the two sets of variables, there exists a natural division rule which is analogous to the standard linear risk adjustment schemes. We show how this rule should be applied if the total level of actual medical expenditures is different from the budget to be divided over the insurers (or providers) and how information from the disturbances in the regression equation can be used in an optimal way. We discuss the analogy with mixed reimbursement systems. If the medical expenditure function is not additively separable in the two sets of variables, the conflict between efficiency and risk selection is unavoidable, even if one has perfect information about that function. The theoretical results are illustrated with empirical results derived from the Belgian setting where the move towards prospective reimbursement of the mutualities has necessitated the introduction of a risk adjustment formula. © 1998 John Wiley & Sons, Ltd.

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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 7 (1998)
Issue (Month): 5 ()
Pages: 465-480
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Handle: RePEc:wly:hlthec:v:7:y:1998:i:5:p:465-480

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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  1. Francois Maniquet, 2002. "On the Equivalence between Welfarism and Equality of Opportunity," Economics Working Papers 0022, Institute for Advanced Study, School of Social Science. [Downloadable!]
    Other versions:
  2. Karen Eggleston & Randall P. Ellis & Mingshan Lu, 2007. "Prevention and Dynamic Risk Adjustment," Boston University - Department of Economics - Working Papers Series WP2007-023, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  3. 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, ADRES, issue 83-84, pages 13, Juillet-D. [Downloadable!]
  4. Amir Shmueli, 1999. "Inferring capitation rates from aggregate health plans' costs," Health Economics, John Wiley & Sons, Ltd., vol. 8(6), pages 547-552.
  5. Tom Van Ourti, 2004. "Measuring horizontal inequity in Belgian health care using a Gaussian random effects two part count data model," Health Economics, John Wiley & Sons, Ltd., vol. 13(7), pages 705-724. [Downloadable!]
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