Modeling individual health care expenditures in China: Evidence to assist payment reform in public insurance

Reforming the payment system of public health insurance from fee‐for‐service to more efficient alternative schemes has become an urgent policy issue in developing countries. Using a large sample of administrative data drawn from China, we examine a variety of econometric models for predicting the medical expenditures of individuals. We show that the standard ordinary least squares model performs relatively well compared with other models. We then propose two alternative payment schemes on risk‐adjusted capitation. The first is a prospective capitation model and the second incorporates both prospective and retrospective features. We simulate the corresponding payments based on model predictions and evaluate the payment/cost ratios for health care providers. The results show that the prospective capitation method generates smaller financial fluctuation, suggesting that policymakers may prefer this method to achieve a smooth transition.