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A critical review of the use of R<sup>2</sup> in risk equalization research.

The European journal of health economics : HEPAC : health economics in prevention and care·2024
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Risk equalization and prevention.

Wynand P M M van de Ven1

  • 1Erasmus School of Health Policy and Management, Erasmus University Rotterdam, Rotterdam, The Netherlands. vandeven@eshpm.eur.nl.

The European Journal of Health Economics : HEPAC : Health Economics in Prevention and Care
|May 6, 2026
PubMed
Summary

Health insurers retain strong incentives for prevention and health improvement, even with risk equalization systems. Sophisticated risk adjustment does not eliminate these incentives, contrary to previous research.

Keywords:
PreventionRisk equalizationRisk selection

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Area of Science:

  • Health Economics
  • Public Health Policy
  • Insurance Markets

Background:

  • Competitive health insurance markets utilize risk equalization systems with health-based risk adjusters.
  • A common argument suggests risk equalization penalizes prevention by reducing insurer revenue when member health improves.

Purpose of the Study:

  • To refute the conclusion that health-based risk equalization eliminates insurer incentives for prevention.
  • To demonstrate that insurers maintain substantial incentives for prevention and health improvement.

Main Methods:

  • Theoretical counterarguments are presented.
  • Empirical evidence regarding insurer behavior in sophisticated risk equalization systems is examined.

Main Results:

  • Both perfect and imperfect health-based prospective risk equalization provide substantial incentives for prevention.
  • Empirical evidence shows insurers continue to offer preventive services and quality care under sophisticated risk equalization.
  • Concurrent or retrospective risk equalization may offer fewer incentives for prevention compared to prospective systems.

Conclusions:

  • Health-based risk equalization systems do not eliminate insurer incentives for prevention and health improvement.
  • Sophisticated risk adjustment mechanisms support, rather than hinder, preventive activities by insurers.
  • Insurers actively engage in prevention and quality care provision, benefiting enrollees' health status.