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Towards a capitation formula for competing health insurers. An empirical analysis

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  • van Vliet, RenéC. J. A.
  • van de Ven, Wynand P. M. M.

Abstract

In many countries the concept of capitating health care insurers is receiving increasing attention. The main reason is, that capitation may induce health care insurers in a competitive environment to concentrate more on cost containment. However, if the adjusters on which capitation payments are based, are too global, there may be ample room for risk selection by the insurers whilst also an unfair distribution of funds over the insurers may result, thereby undermining the objectives of capitation. The prime motivation for the present study is, that the Dutch government, as part of proposals for a new, market oriented structure of health care system, is considering to capitate insurers on the basis of global parameters like age, gender and location. Our analysis based on panel data of some 35,000 individuals, shows that the proportion of variance in annual health care expenditures that can be predicted (R2) by such a global capitation formula, is only 0.024. This is less than of our estimate of the theoretically maximum achievable R2 which amounts to 0.138, implying the existence of abundant selection oppurtunities, e.g. on the basis of past expenditures or other health indicators. Alternative capitation formulae incorporating prior-year's costs and reaching about of the maximum obtainable R2, effectively remove the profitableness of selection on the basis of past expenditures. The findings suggest, however, that selection via (chronic) health status may still be profitable to some extent. Therefore, we also analyzed data from the Dutch Health Interview Survey (N [approximate] 20,000) which comprised better health indicators. It appeared that a capitation formula based on the global adjusters mentioned above as well as three health status indicators and several background characteristics, yields an R2 of about 0.114, which probably accounts for of our estimate of the maximum obtainable R2. The main conclusion is, that in the short term information on prior expenditures, which is available in the files of most insurers and thus may be used for risk selection, should be included in the capitation formula. For the more distant duture, the formula should be expanded with indicators of chronic health status, possibly based on diagnostic information from previous, non-discretionary hospitalizations.

Suggested Citation

  • van Vliet, RenéC. J. A. & van de Ven, Wynand P. M. M., 1992. "Towards a capitation formula for competing health insurers. An empirical analysis," Social Science & Medicine, Elsevier, vol. 34(9), pages 1035-1048, May.
  • Handle: RePEc:eee:socmed:v:34:y:1992:i:9:p:1035-1048
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    Citations

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    Cited by:

    1. Shen, Yujing & Ellis, Randall P., 2002. "Cost-minimizing risk adjustment," Journal of Health Economics, Elsevier, vol. 21(3), pages 515-530, May.
    2. Segal, Leonie & Dunt, David & Day, Susan E., 2004. "Introducing coordinated care (2): evaluation of design features and implementation processes implications for a preferred health system reform model," Health Policy, Elsevier, vol. 69(2), pages 215-228, August.
    3. van de Ven, Wynand P. M. M. & van Vliet, ReneC. J. A., 1995. "Consumer information surplus and adverse selection in competitive health insurance markets: An empirical study," Journal of Health Economics, Elsevier, vol. 14(2), pages 149-169, June.
    4. S. Veen & R. Kleef & W. Ven & R. Vliet, 2015. "Improving the prediction model used in risk equalization: cost and diagnostic information from multiple prior years," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(2), pages 201-218, March.
    5. Frank, Richard G. & Glazer, Jacob & McGuire, Thomas G., 2000. "Measuring adverse selection in managed health care," Journal of Health Economics, Elsevier, vol. 19(6), pages 829-854, November.
    6. 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, August.
    7. Grytten, Jostein & Sorensen, Rune, 2003. "Practice variation and physician-specific effects," Journal of Health Economics, Elsevier, vol. 22(3), pages 403-418, May.
    8. Barros, Pedro Pita, 2003. "Cream-skimming, incentives for efficiency and payment system," Journal of Health Economics, Elsevier, vol. 22(3), pages 419-443, May.
    9. Chernichovsky, Dov & van de Ven, Wynand P. M. M., 2003. "Risk adjustment in Europe," Health Policy, Elsevier, vol. 65(1), pages 1-3, July.
    10. Keeler, Emmett B. & Carter, Grace & Newhouse, Joseph P., 1998. "A model of the impact of reimbursement schemes on health plan choice," Journal of Health Economics, Elsevier, vol. 17(3), pages 297-320, June.
    11. Blough, David K. & Madden, Carolyn W. & Hornbrook, Mark C., 1999. "Modeling risk using generalized linear models," Journal of Health Economics, Elsevier, vol. 18(2), pages 153-171, April.

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