Direct versus indirect standaardization in risk adjustment
AbstractDirect 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 InfoPaper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces0733.
Date of creation: Mar 2007
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Other versions of this item:
- Schokkaert, Erik & Van de Voorde, Carine, 2009. "Direct versus indirect standardization in risk adjustment," Journal of Health Economics, Elsevier, vol. 28(2), pages 361-374, March.
- SCHOKKAERT, Erik & VAN DE VOORDE, Carine, . "Direct versus indirect standardization in risk adjustment," CORE Discussion Papers RP -2139, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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