Improving risk equalization for individuals with persistently high costs: Experiences from the Netherlands

Risk-equalization (RE) models in competitive health insurance markets have become increasingly sophisticated. However, these models still have important imperfections. A specific problem in the Netherlands is that insurers are insufficiently compensated for individuals who can persistently be found in the right-end tail of the cost distribution.

The goal of this study is to explore and evaluate options for improving compensation for persistently high-cost individuals in the Dutch basic health insurance.

Prescription drugs claims (2012) and administrative data on costs and risk-characteristics (2010-2013) for the entire Dutch population are used to identify high-cost individuals and evaluate improvement options. These options - including new risk-classes and a form of risk-sharing - are evaluated in terms of insurers' incentives for risk-selection and efficiency.

Three significantly undercompensated high-cost groups are identified: users of specific expensive drugs for rare diseases, hemophilia-patients, and individuals whose costs are in the top-0.50% in 3 prior years. The improvement options effectively remove the undercompensations for these groups and lead to a considerable improvement in individual-level model fit. However, the options differ in terms of their (potential) effects on insurers' efficiency incentives.

Although this study provides useful insights in the possibilities for improving RE-models for persistently high-cost individuals, improving compensation remains challenging and dependent on the ongoing debate regarding coverage and reimbursement of expensive drugs.