On the calculation of the Israeli risk adjustment rates

The Israeli risk adjustment formula, introduced in 1995 and which serves for the allocation of the health budget to the sickness funds, is unique compared to countries with a similar national health insurance system in that it is not calculated on the basis of actual cost data of the sickness funds but on the basis of quantities retrieved from surveys. The current article aims to analyze the implications of the Israeli methodology.

The article examines the validity of the Israeli methodology used to set the 2004 risk adjustment rates and compare these rates with the "correct" ones, which are derived from the 2004 internal relative cost scales of the sickness funds.

The Israeli methodology ignores services provided by the sickness funds and assumes constant unit cost across the sickness funds, an assumption which is implausible. Comparing the actual and the "correct" rates, it turns out that the actual rates over-compensate all the sickness funds for members in age 0-14, and under-compensate them for insurees aged 55+. In age 0-4, the over-compensation per capita is about NIS 1,500 while the under-compensation in age group 75+ reaches NIS 1,600.

The current risk adjustment formula distorts the intended competition on good quality care among the sickness funds, and turns it into a competition on profitable members. After 18 years of using incorrect rates, the Israeli risk adjustment rates should be calculated, as is common in other systems, based on individual cost data from the sickness funds.