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Direct versus indirect standaardization in risk adjustment

  • Erik Schokkaert
  • Carine Van De Voorde

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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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces0733.

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Date of creation: Mar 2007
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Handle: RePEc:ete:ceswps:ces0733
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  1. van de Ven, Wynand P.M.M. & Beck, Konstantin & Van de Voorde, Carine & Wasem, Jurgen & Zmora, Irit, 2007. "Risk adjustment and risk selection in Europe: 6 years later," Health Policy, Elsevier, vol. 83(2-3), pages 162-179, October.
  2. Marc FLEURBAEY, 2006. "Health, equity and social welfare," Annales d'Economie et de Statistique, ENSAE, issue 83-84, pages 21-59.
  3. Iñigo Iturbe Ormaetxe, 1995. "Redistribution And Individual Characteristics," Working Papers. Serie AD 1995-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. Bossert W., 1996. "Redistribution mechanisms based on individual characteristics," Mathematical Social Sciences, Elsevier, vol. 31(1), pages 51-51, February.
  5. Erik SCHOKKAERT & Carine VAN DE VOORDE, 2000. "Risk Selection and the Specification of the Conventional Risk Adjustment Formula," Center for Economic Studies - Discussion papers ces0011, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  6. Adam Wagstaff & Eddy van Doorslaer, 2000. "Measuring and Testing for Inequity in the Delivery of Health Care," Journal of Human Resources, University of Wisconsin Press, vol. 35(4), pages 716-733.
  7. Roland Luttens & Dirk gaer, 2007. "Lorenz Dominance and Non-welfaristic Redistribution," Social Choice and Welfare, Springer, vol. 28(2), pages 281-302, February.
  8. 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.
  9. 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.
  10. Erik SCHOKKAERT & Carine VAN DE VOORDE, 2006. "Incentives for risk selection and omitted variables in the risk adjustment formula," Annales d'Economie et de Statistique, ENSAE, issue 83-84, pages 327-351.
  11. Hugh Gravelle & Matthew Sutton & Stephen Morris & Frank Windmeijer & Alastair Leyland & Chris Dibben & Mike Muirhead, 2003. "Modelling supply and demand influences on the use of health care: implications for deriving a needs-based capitation formula," Health Economics, John Wiley & Sons, Ltd., vol. 12(12), pages 985-1004.
  12. 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.
  13. Fleurbaey, Marc & Schokkaert, Erik, 2009. "Unfair inequalities in health and health care," Journal of Health Economics, Elsevier, vol. 28(1), pages 73-90, January.
  14. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
  15. Fleurbaey, Marc, 2012. "Fairness, Responsibility, and Welfare," OUP Catalogue, Oxford University Press, number 9780199653591, March.
  16. van de Ven, Wynand P. M. M. & Beck, Konstantin & Buchner, Florian & Chernichovsky, Dov & Gardiol, Lucien & Holly, Alberto & Lamers, Leida M. & Schokkaert, Erik & Shmueli, Amir & Spycher, Stephan & Van, 2003. "Risk adjustment and risk selection on the sickness fund insurance market in five European countries," Health Policy, Elsevier, vol. 65(1), pages 75-98, July.
  17. Marc Fleurbaey & Walter Bossert, 1996. "Redistribution and compensation (*)," Social Choice and Welfare, Springer, vol. 13(3), pages 343-355.
  18. Hugh Gravelle, 2003. "Measuring income related inequality in health: standardisation and the partial concentration index," Health Economics, John Wiley & Sons, Ltd., vol. 12(10), pages 803-819.
  19. Fleurbaey Marc, 1995. "Three Solutions for the Compensation Problem," Journal of Economic Theory, Elsevier, vol. 65(2), pages 505-521, April.
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