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

Author

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  • 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)

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.

Suggested Citation

  • Erik Schokkaert & Geert Dhaene & Carine Van De Voorde, 1998. "Risk adjustment and the trade-off between efficiency and risk selection: an application of the theory of fair compensation," Health Economics, John Wiley & Sons, Ltd., vol. 7(5), pages 465-480.
  • Handle: RePEc:wly:hlthec:v:7:y:1998:i:5:p:465-480 DOI: 10.1002/(SICI)1099-1050(199808)7:5<465::AID-HEC365>3.0.CO;2-9
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Schokkaert, Erik & Van de Voorde, Carine, 2004. "Risk selection and the specification of the conventional risk adjustment formula," Journal of Health Economics, Elsevier, vol. 23(6), pages 1237-1259, November.
    2. Stam, Pieter J.A. & van Vliet, René C.J.A. & van de Ven, Wynand P.M.M., 2010. "A limited-sample benchmark approach to assess and improve the performance of risk equalization models," Journal of Health Economics, Elsevier, vol. 29(3), pages 426-437, May.
    3. Erwin Ooghe & Erik Schokkaert, 2016. "School accountability: can we reward schools and avoid pupil selection?," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 46(2), pages 359-387, February.
    4. Fleurbaey, Marc & Schokkaert, Erik, 2009. "Unfair inequalities in health and health care," Journal of Health Economics, Elsevier, vol. 28(1), pages 73-90, January.
    5. Erik Schokkaert & Kurt Devooght, 2003. "Responsibility-sensitive fair compensation in different cultures," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 21(2), pages 207-242, October.
    6. 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.
    7. Sato, Azusa, 2012. "Do Inequalities in Health Care Utilization in Developing Countries Change When We Take into Account Traditional Medicines?," World Development, Elsevier, vol. 40(11), pages 2275-2289.
    8. Amir Shmueli, 1999. "Inferring capitation rates from aggregate health plans' costs," Health Economics, John Wiley & Sons, Ltd., vol. 8(6), pages 547-552.
    9. Dhaene, Geert & Schokkaert, Erik & Van de Voorde, Carine, 2003. "Best affine unbiased response decomposition," Journal of Multivariate Analysis, Elsevier, vol. 86(2), pages 242-253, August.
    10. Brilleman, Samuel L. & Gravelle, Hugh & Hollinghurst, Sandra & Purdy, Sarah & Salisbury, Chris & Windmeijer, Frank, 2014. "Keep it simple? Predicting primary health care costs with clinical morbidity measures," Journal of Health Economics, Elsevier, vol. 35(C), pages 109-122.
    11. van de Ven, Wynand P. M. M. & van Vliet, Rene C. J. A. & Schut, Frederik T. & van Barneveld, Erik M., 2000. "Access to coverage for high-risks in a competitive individual health insurance market: via premium rate restrictions or risk-adjusted premium subsidies?," Journal of Health Economics, Elsevier, vol. 19(3), pages 311-339, May.
    12. X. Ramos & D. Van De Gaer, 2012. "Empirical Approaches to Inequality of Opportunity: Principles, Measures, and Evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/792, Ghent University, Faculty of Economics and Business Administration.
    13. Schut, Frederik T. & van Doorslaer, Eddy K. A., 1999. "Towards a reinforced agency role of health insurers in Belgium and the Netherlands," Health Policy, Elsevier, vol. 48(1), pages 47-67, July.
    14. Perelman, Julian & Shmueli, Amir & Closon, Marie-Christine, 2008. "Deriving a risk-adjustment formula for hospital financing: Integrating the impact of socio-economic status on length of stay," Social Science & Medicine, Elsevier, vol. 66(1), pages 88-98, January.
    15. François Maniquet, 2004. "On the equivalence between welfarism and equality of opportunity," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 23(1), pages 127-147, August.
    16. 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.
    17. Samuel L Brilleman & Hugh Gravelle & Sandra Hollinghurst & Sarah Purdy & Chris Salisbury & Frank Windmeijer, 2011. "Keep it Simple? Predicting Primary Health Care Costs with Measures of Morbidity and Multimorbidity," Working Papers 072cherp, Centre for Health Economics, University of York.
    18. repec:clg:wpaper:2007-06 is not listed on IDEAS
    19. Christine Arentz & Johann Eekhoff & Susanna Kochskämper, 2012. "Private health insurance: a role model for European health systems," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 13(5), pages 615-621, October.
    20. 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.
    21. Susanna Kochskämper, 2012. "Reformdebatten in der Krankenversicherung vor dem Hintergrund des europäischen Binnenmarktes," Otto-Wolff-Institut Discussion Paper Series 02/2012, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
    22. Wynand P. M. M. Ven & René C. J. A. Vliet & Richard C. Kleef, 2017. "How can the regulator show evidence of (no) risk selection in health insurance markets? Conceptual framework and empirical evidence," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 18(2), pages 167-180, March.
    23. Schokkaert, Erik & Van de Voorde, Carine, 2003. "Belgium: risk adjustment and financial responsibility in a centralised system," Health Policy, Elsevier, vol. 65(1), pages 5-19, July.

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