Do insurers respond to risk adjustment? A long-term, nationwide analysis from Switzerland

Community rating in social health insurance calls for risk adjustment in order to eliminate incentives for risk selection. Swiss risk adjustment is known to be insufficient, and substantial risk selection incentives remain. This study develops five indicators to monitor residual risk selection. Three indicators target activities of conglomerates of insurers (with the same ownership), which steer enrollees into specific carriers based on applicants' risk profiles. As a proxy for their market power, those indicators estimate the amount of premium-, health care cost-, and risk-adjustment transfer variability that is attributable to conglomerates. Two additional indicators, derived from linear regression, describe the amount of residual cost differences between insurers that are not covered by risk adjustment. All indicators measuring conglomerate-based risk selection activities showed increases between 1996 and 2009, paralleling the establishment of new conglomerates. At their maxima in 2009, the indicator values imply that 56% of the net risk adjustment volume, 34% of premium variability, and 51% cost variability in the market were attributable to conglomerates. From 2010 onwards, all indicators decreased, coinciding with a pre-announced risk adjustment reform implemented in 2012. Likewise, the regression-based indicators suggest that the volume and variance of residual cost differences between insurers that are not equaled out by risk adjustment have decreased markedly since 2009 as a result of the latest reform. Our analysis demonstrates that risk-selection, especially by conglomerates, is a real phenomenon in Switzerland. However, insurers seem to have reduced risk selection activities to optimize their losses and gains from the latest risk adjustment reform.