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Risk adjustment in health insurance and its long-term effectiveness


  • Beck, Konstantin
  • Trottmann, Maria
  • Zweifel, Peter


This paper seeks to create new insights when judging the impact different risk adjustment schemes may have on the incentive to select risks. It distinguishes risk types with high and low profit potential and estimates long-run profits associated with risk selection in four scenarios (no risk adjustment, demographic only, including prior hospitalization, and including prior hospitalization and Pharmaceutical Cost Groups). The database covers 180,000 Swiss individuals over 8 years, 3 of which are used for model building and 5, to estimate insurers' profits due to risk selection in the four scenarios. While these profits prove to be very high without risk adjustment and still substantial with demographic risk adjustment, they become surprisingly low when the crude morbidity indicator 'prior hospitalization' is included in the formula. These results clearly indicate the need for health status-related risk adjustment in insurance markets with community rating, taking into account insurers' planning horizon.

Suggested Citation

  • Beck, Konstantin & Trottmann, Maria & Zweifel, Peter, 2010. "Risk adjustment in health insurance and its long-term effectiveness," Journal of Health Economics, Elsevier, vol. 29(4), pages 489-498, July.
  • Handle: RePEc:eee:jhecon:v:29:y:2010:i:4:p:489-498

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    References listed on IDEAS

    1. Yujing Shen & Randall P. Ellis, 2002. "How profitable is risk selection? A comparison of four risk adjustment models," Health Economics, John Wiley & Sons, Ltd., vol. 11(2), pages 165-174.
    2. Peter Zweifel & Stefan Felder & Andreas Werblow, 2004. "Population Ageing and Health Care Expenditure: New Evidence on the "Red Herring"," The Geneva Papers on Risk and Insurance, The International Association for the Study of Insurance Economics, vol. 29(4), pages 652-666, October.
    3. Newhouse, Joseph P., 1982. "Is competition the answer?," Journal of Health Economics, Elsevier, vol. 1(1), pages 109-116, May.
    4. 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.
    5. Zweifel, Peter & Breuer, Michael, 2006. "The case for risk-based premiums in public health insurance," Health Economics, Policy and Law, Cambridge University Press, vol. 1(02), pages 171-188, April.
    6. Zweifel, Peter, 2007. "The Theory of Social Health Insurance," Foundations and Trends(R) in Microeconomics, now publishers, vol. 3(3), pages 183-273, May.
    7. Erik van Barneveld & Leida Lamers & René van Vliet & Wynand van de Ven, 2000. "Ignoring small predictable profits and losses: a new approach for measuring incentives for cream skimming," Health Care Management Science, Springer, vol. 3(2), pages 131-140, February.
    8. Duan, Naihua, et al, 1983. "A Comparison of Alternative Models for the Demand for Medical Care," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 115-126, April.
    9. Pauly, Mark & Nickel, Andreas & Kunreuther, Howard, 1998. "Guaranteed Renewability with Group Insurance," Journal of Risk and Uncertainty, Springer, vol. 16(3), pages 211-221, July-Aug..
    10. Manning, Willard G. & Mullahy, John, 2001. "Estimating log models: to transform or not to transform?," Journal of Health Economics, Elsevier, vol. 20(4), pages 461-494, July.
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    Cited by:

    1. repec:pal:compes:v:59:y:2017:i:3:d:10.1057_s41294-017-0027-3 is not listed on IDEAS
    2. repec:lrk:eeaart:31_2_8 is not listed on IDEAS
    3. Schmid, Christian P.R. & Beck, Konstantin, 2016. "Re-insurance in the Swiss health insurance market: Fit, power, and balance," Health Policy, Elsevier, vol. 120(7), pages 848-855.
    4. De Pietro, Carlo & Crivelli, Luca, 2015. "Swiss popular initiative for a single health insurer… once again!," Health Policy, Elsevier, vol. 119(7), pages 851-855.
    5. Richard van Kleef & Thomas McGuire & Rene van Vliet & Wynand van de Ven, 2015. "Improving Risk Equalization with Constrained Regression," NBER Working Papers 21570, National Bureau of Economic Research, Inc.
    6. Okma, Kieke G.H. & Crivelli, Luca, 2013. "Swiss and Dutch “consumer-driven health care”: Ideal model or reality?," Health Policy, Elsevier, vol. 109(2), pages 105-112.
    7. Timothy J. Layton & Randall P. Ellis & Thomas G. McGuire, 2015. "Assessing Incentives for Adverse Selection in Health Plan Payment Systems," Boston University - Department of Economics - Working Papers Series wp2015-024, Boston University - Department of Economics.
    8. Peter Zweifel, 2013. "The present state of health economics: a critique and an agenda for the future," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(4), pages 569-571, August.
    9. Viktor von Wyl & Konstantin Beck, 2016. "Do insurers respond to risk adjustment? A long-term, nationwide analysis from Switzerland," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(2), pages 171-183, March.
    10. Pieter Bakx & Frederik Schut & Eddy Doorslaer, 2015. "Can universal access and competition in long-term care insurance be combined?," International Journal of Health Economics and Management, Springer, vol. 15(2), pages 185-213, June.
    11. Jan Brosse & Mathias Kifmann, 2013. "Competition in Health Insurance and Premium Regulation," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(1), pages 21-26, 04.
    12. repec:ces:ifodic:v:11:y:2013:i:1:p:19083487 is not listed on IDEAS
    13. Frech, Ted E & Zweifel, Peter, 2015. "Why ‘Optimal’ Payment for Healthcare Providers Can Never Be Optimal Under Community Rating," University of California at Santa Barbara, Economics Working Paper Series qt37b9q0k3, Department of Economics, UC Santa Barbara.
    14. Viktor von Wyl & Konstantin Beck, 2014. "Risk adjustment in aging societies," Health Economics Review, Springer, vol. 4(1), pages 1-14, December.


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