A new method is proposed to assess and improve the performance of risk equalization models in competitive markets for individual health insurance, where compensation is intended for variation in observed expenditures due to so-called S(ubsidy)-type risk factors but not for variation due to other, so-called N(onsubsidy)-type risk factors. Given the availability of a rich subsample of individuals for which normative expenditures, YNORM, can be accurately determined, we make two contributions: (a) any risk equalization scheme applied to the entire population, YREF, should be evaluated through its performance in the subsample, by comparing YREF with YNORM (not by comparing YREF with observed expenditures, Y, in the entire population, as commonly done); (b) conventional risk equalization schemes can be improved by the subsample regression of YNORM, rather than Y, on the risk adjusters that are observable in the entire population. This new method is illustrated by an application to the 2004 Dutch risk equalization model.

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Keywords Age Factors, Benchmarking/*methods, Demography, Female, Health Care Costs/statistics & numerical data, Health Expenditures/statistics & numerical data, Health insurance, Humans, Insurance, Health/*economics, Male, Managed competition, Models, Theoretical, Netherlands, Optimal risk adjustment, Risk Factors, Risk Management/*methods, Risk equalization, Sex Factors, Subsidies
JEL G22, Insurance; Insurance Companies (jel), I10, Health: General (jel), I11, Analysis of Health Care Markets (jel), I18, Government Policy; Regulation; Public Health (jel)
Persistent URL dx.doi.org/10.1016/j.jhealeco.2010.02.001, hdl.handle.net/1765/23142
Stam, P.J.A, van Vliet, R.C.J.A, & van de Ven, W.P.M.M. (2010). A limited-sample benchmark approach to assess and improve the performance of risk equalization models. Journal of Health Economics, 29(3), 426–437. doi:10.1016/j.jhealeco.2010.02.001