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Designing incenttives in local public utilities, an international comparison of the drinking water sector

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  • Kristof De Witte
  • Rui C. Marques

Abstract

Direct and indirect standardization procedures aim at comparing differences in health or differences 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. We analyse this analogy within the theoretical framework proposed in the recent social choice literature on responsibility and compensation. 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 (as proposed for Ireland) 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 egalitarianequivalent (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

Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces0732.

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Date of creation: Mar 2007
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Handle: RePEc:ete:ceswps:ces0732

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Cited by:
  1. Rita Martins & Fernando Coelho & Adelino Fortunato, 2008. "Water Losses and Hydrographical Regions Influence on the Cost Structure of the Portuguese Water Industry," GEMF Working Papers 2008-06, GEMF - Faculdade de Economia, Universidade de Coimbra.
  2. De Witte, Kristof & Marques, Rui, 2009. "Gaming in a benchmarking environment. A non-parametric analysis of benchmarking in the water sector," MPRA Paper 14679, University Library of Munich, Germany.
  3. Kristof De Witte & Elbert Dijkgraaf, 2007. "Mean and Bold?," Tinbergen Institute Discussion Papers 07-092/3, Tinbergen Institute.

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