Selection Incentives for Health Insurers in the Presence of Sophisticated Risk Adjustment

Abstract

This article analyzes selection incentives for insurers in the Dutch basic health insurance market, which operates with community-rated premiums and sophisticated risk adjustment. Selection incentives result from the interplay of three market characteristics: possible actions by insurers, consumer response to these actions, and predictable variation in profitability of insurance contracts. After a qualitative analysis of the first two characteristics our primary objective is to identify the third. Using a combination of claims data (N = 16.8 million) and survey information (N = 387,195), we find substantial predictable variation in profitability. On average, people in good health are profitable, while those in poor health are unprofitable. We conclude that Dutch insurers indeed face selection incentives. A complete measure of selection incentives, however, captures the correlation between individual-level profitability and consumer response to insurer-actions. Obtaining insight in this correlation is an important direction for further research.

The Social Determinants of Choice Quality: Evidence from Health Insurance in the Netherlands

“…8 To limit incentives for selection of consumers based on their health, the government has installed a sophisticated risk adjustment system. Yet, van Kleef, Eijkenaar and van Vliet (2019) show it is still profitable for insurers to attract healthy consumers. 9 The basic package covers drugs, doctor and hospital expenditures.…”

The Social Determinants of Choice Quality: Evidence from Health Insurance in the Netherlands

“…8 To limit incentives for selection of consumers based on their health, the government has installed a sophisticated risk adjustment system. Yet, van Kleef, Eijkenaar and van Vliet (2019) show it is still profitable for insurers to attract healthy consumers.…”

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