Risk equalization

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Risk equalization is a way of equalizing the risk profiles of insurance members to avoid loading premiums on the insured to some predetermined extent.

In health insurance, it enables private health insurance to operate in some countries to be offered at a common rate for all even though insurers are not allowed by law to reject clients or impose special conditions for their health insurance. That is achieved by transfer payments by a risk equalization pool usually run by a neutral party, such as a government agency.

Health care

In unregulated

exercising) and, via differentiated bonuses for multiyear no-claim, to prior costs.[1]

Some nations that encourage private insurance for health care still seek to prevent insurers from engaging in risk minimizing actions to load the premiums of people with certain high-risk profiles, typically the elderly, the sick, and to some extent, women. Thus, financial transfers are needed in order to prohibit any discriminatory practices against these subgroups without increasing costs on insurers. This is done by arranging for a third party to organize a

regulatory system of risk-adjusted premium subsidies.[1]

The financial transfers are then channeled via a so-called Subsidy Fund. In

subsidies
in their health insurance market, the sponsor organizes it in the form of risk equalization among health insurers: the risk-adjusted premium subsidies for the insured are channelled to the insurers. Then, the Subsidy Fund is called a Risk Equalization Fund (REF). An insurer receives a relatively large sum of subsidies by the REF if the risk profile of their members is relatively unhealthy and vice versa.

Although premiums can be rated across many subgroups of insured people, a sponsor may not want to

subsidize all observed premium rate variation, in practice. The total set of risk factors used by insurers to rate their premiums can be divided in two subsets: the subset of risk factors that cause premium rate variation that the sponsor decides to subsidize, the S(ubsidy)-type risk factors; and the subset that causes premium rate variations which the sponsor does not want to subsidize, the N(on-subsidy)-type risk factors.[2]

Gender, health status and (to a certain extent) age will, in most countries, be considered S-type risk factors. Examples of potential N-type risk factors are a high propensity for medical consumption, living in a region with high prices and/or overcapacity resulting in supply-induced demand, or using providers with an inefficient practice-style.

incentives for efficiency
are not reduced.

That[

Health care in the Netherlands) Dutch insurers are not allowed to risk-rate their premiums.[4] In practice, the sponsor often encounters difficulties to find adequate measures of the S-type risk factors (such as health status) to include in the risk equalization model.[5]

The concept was put in the US healthcare law, passed in 2010, the

cherry pick lower risk groups.[6][7]

References

Notes

  1. ^ a b c Van de Ven et al. 2000
  2. ^ Van de Ven and Ellis 2000, p. 768-769
  3. ^ Microsoft Word – -HEA8 cover page – new template.doc
  4. ^ Stam 2007 – Presents research results on the effectiveness of the 2004 Dutch risk equalization model.
  5. ^ Archived at Ghostarchive and the Wayback Machine: Risk equalization: Part 2 of 2. YouTube.
  6. ^ Discussion of US law
  7. ^ "HHS Officials Explain Risk Adjustment Methodology"

External links

Videos

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