Can universal access and competition in long-term care insurance be combined?

In countries with a public long-term care (LTC) insurance scheme administered by multiple non-competing insurers, these insurers typically lack incentives for purchasing cost-effective LTC because they are not at risk for LTC expenses. Plans to introduce these incentives by allowing competition among risk bearing LTC insurers are likely to jeopardize universal access. Combining universal access and competition among risk bearing LTC-insurers requires an adequate system of risk adjustment. While risk adjustment is now widely adopted in health insurance, LTC-specific features cause uncertainty about the feasibility of risk adjustment for LTC insurance. We examine the feasibility of appropriate risk adjustment in LTC insurance by using a rich set of linked nationwide Dutch administrative data. As expected, prior LTC use and demographic information are found to explain much of the variation in individual LTC expenses. However, we find that prior health care expenditures are also important in reducing predicted losses for subgroups of health care users. Nevertheless, incentives for risk selection against some easily identifiable subgroups persist. Moreover, using prior utilization and expenditure as risk adjusters reduces incentives for efficiency, creating a trade-off between equity and efficiency. To ease this trade-off, data on individuals' underlying needs for LTC are required.