When public long-term care (LTC) insurance is provided by insurers, they typically lack incentives for purchasing cost-effective LTC. Providing insurers with appropriate incentives for efficiency without jeopardizing access for high-risk individuals requires, among other things, an adequate system of risk adjustment. While risk adjustment is now widely adopted in health insurance, it is unclear whether adequate risk adjustment is feasible for LTC because of its specific features. We examine the feasibility of risk adjustment for LTC insurance using a rich set of linked nationwide Dutch administrative data. Prior LTC use and demographic information are found to explain much of the variation, while prior health care expenditures are important in reducing predicted losses for subgroups of health care users. Nevertheless, incentives for risk selection against some easily identifiable subgroups persist. Moreover, using prior utilization and expenditure as risk adjusters dilutes incentives for efficiency, but using multiyear data may reduce this disadvantage.

long-term care, managed competition, public insurance, risk adjustment
Government Expenditures and Health (jel H51), Analysis of Health Care Markets (jel I11), Government Policy; Regulation; Public Health (jel I18), Oligopoly and Other Imperfect Markets (jel L13)
Tinbergen Institute
hdl.handle.net/1765/38749
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Tinbergen Institute Discussion Paper No. 13-017/V
Erasmus School of Economics

Bakx, P.L.H, Schut, F.T, & van Doorslaer, E.K.A. (2013). Can Risk Adjustment prevent Risk Selection in a Competitive Long-Term Care Insurance Market? (No. TI 13-017/V). Discussion paper / Tinbergen Institute (pp. 1–41). Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/38749