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The European Journal of Health Economics

pp 1–20

First Online: 10 December 2016Received: 06 July 2016Accepted: 24 November 2016DOI: 10.1007-s10198-016-0859-1

Cite this article as: van Kleef, R.C., McGuire, T.G., van Vliet, R.C.J.A. et al. Eur J Health Econ 2016. doi:10.1007-s10198-016-0859-1


State-of-the-art risk equalization models undercompensate some risk groups and overcompensate others, leaving systematic incentives for risk selection. A natural approach to reducing the under- or overcompensation for a particular group is enriching the risk equalization model with risk adjustor variables that indicate membership in that group. For some groups, however, appropriate risk adjustor variables may not yet be available. For these situations, this paper proposes an alternative approach to reducing under- or overcompensation: constraining the estimated coefficients of the risk equalization model such that the under- or overcompensation for a group of interest equals a fixed amount. We show that, compared to ordinary least-squares, constrained regressions can reduce under-overcompensation for some groups but increase under-overcompensation for others. In order to quantify this trade-off two fundamental questions need to be answered: -Which groups are relevant in terms of risk selection actions?- and -What is the relative importance of under- and overcompensation for these groups?- By making assumptions on these aspects we empirically evaluate a particular set of constraints using individual-level data from the Netherlands N = 16.5 million. We find that the benefits of introducing constraints in terms of reduced under-overcompensations for some groups can be worth the costs in terms of increased under-overcompensations for others. Constrained regressions add a tool for developing risk equalization models that can improve the overall economic performance of health plan payment schemes.

KeywordsHealth insurance Risk equalization Capitation Risk selection Constrained regression JEL ClassificationI11 I13 G22  Download fulltext PDF

Author: Richard C. van Kleef - Thomas G. McGuire - René C. J. A. van Vliet - Wynand P. P. M. van de Ven


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