Risk Adjustment, Risk Sharing and Premium Regulation in Health Insurance Markets

Theory and Practice

Thomas G. McGuire, Richard C. Van Kleef

• Publisher: Academic Press
• Year: 2018
• ISBN:
  9780128113264
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Risk Adjustment, Risk Sharing and Premium Regulation in Health Insurance Markets: Theory and Practice describes the goals, design and evaluation of health plan payment systems.

Part I contains 5 chapters discussing the role of health plan payment in regulated health insurance markets, key aspects of payment design (i.e. risk adjustment, risk sharing and premium regulation), and evaluation methods using administrative data on medical spending.

Part II contains 14 chapters describing the health plan payment system in 14 countries and sectors around the world, including Australia, Belgium, Chile, China, Columbia, Germany, Ireland, Israel, the Netherlands, Russia, Switzerland and the United States. Authors discuss the evolution of these payment schemes, along with ongoing reforms and key lessons on the design of health plan payment.

• Provides a conceptual toolkit that describes the goals, design and evaluation of health plan payment systems in the context of policy paradigms, such as efficiency, affordability, fairness and avoidance of risk selection
• Brings together international experience from many different countries that apply regulated competition in different ways
• Delivers a practical toolkit for the evaluation of health plan payment modalities from the standpoint of efficiency and fairness

Part I

Theory

Outline

• Chapter 1 Regulated Competition in Health Insurance Markets
• Chapter 2 Premium Regulation, Risk Equalization, Risk Sharing, and Subsidies
• Chapter 3 Risk Adjustment for Health Plan Payment
• Chapter 4 Risk Sharing
• Chapter 5 Evaluating the Performance of Health Plan Payment Systems

Chapter 1

Regulated Competition in Health Insurance Markets

Paradigms and Ongoing Issues

Thomas G. McGuire¹ and Richard C. van Kleef², ¹Department of Health Care Policy, Harvard Medical School and the NBER, Boston, MA, United States, ²Erasmus School of Health Policy and Management, Erasmus University Rotterdam, Rotterdam, The Netherlands

Abstract

In many countries public policy towards health insurance is guided by principles of regulated (or managed) competition. This introductory chapter gives an overview of the intellectual roots of regulated competition and shows how elements of this concept are put into practice in the United States, Europe, Asia, Australia, and Latin America. While there is considerable heterogeneity in the details of the regulations in these markets, there are also many commonalities. In each of these markets, health plan payment serves as a cornerstone for simultaneously achieving efficiency goals and objectives related to fairness. This chapter gives a flavor of the diversity of payment systems and the tradeoffs involved. We conclude by explaining how we see the volume as contributing to policy and research on regulated competition and health plan payment.

Keywords

Health insurance; regulated competition; health plan payment systems

1.1 Introduction

Around the world we find health insurance systems characterized by “regulated (or managed) competition,” systems in which private health insurers compete on price and quality within bounds set by regulation. The institutional antecedents of these systems are diverse; some evolved from market-based insurance systems, such as in the United States, some from private nonmarket institutions such as the sickness funds in Germany and the Netherlands, and some from single-payer public insurance, as in Israel. Despite their different paths of reform, everywhere these systems share, in broad terms, common objectives of access, fairness in financing, and efficiency in both the health insurance products and in healthcare provision. Though the relative importance of these objectives differs across systems, countries and sectors share the challenge of evaluating and mediating the tradeoffs among the objectives.

Again speaking broadly, public systems, even when adequately financed, tend to do well on access and fairness, but do less well on serving diverse preferences (for insurance and health care), promoting innovation, and conveying to providers incentives for quality and cost control. Unfettered private health insurance markets, while generally effective at conferring incentives for innovation, quality, and cost control, also suffer from well-known problems, score poorly on access and fairness, and frustrate social objectives relating to supporting care for sicker, more costly members of society.

The regulated competition approach seeks to draw on the strengths and avoid the shortcomings of pure public or pure market systems. The essence of this approach is that a “regulator” decides where competition should work to affect health insurance outcomes and where these outcomes should be set by regulation. For example, a “minimum benefit package” might constrain competition on insurance product design, allowing competition for more but not less coverage; premium regulation might permit plans to set the level of premium overall but prohibit setting different premiums for subgroups of the population; and so on. This chapter begins in Section 1.2 with an overview of the intellectual roots of regulated competition, introducing the seminal ideas of Alain Enthoven and Peter Diamond. Section 1.3 illustrates how the forms of regulated competition proposed by these scholars have been put into practice in the United States, Europe, Asia, Australia, and Latin America. Section 1.4 summarizes the menu of regulatory tools used for structuring and monitoring competition in health insurance and places health plan payment—the focus of this volume—in the context of these tools. Section 1.5 sketches the outline of this entire 19-chapter volume and explains how we see the current volume as contributing to policy and research on regulated competition and health plan payment.

1.2 Intellectual Roots of Regulated Competition

The intellectual roots of regulated competition trace back to Alain Enthoven, an economist and planner who served in the Departments of Defense and the (then-named) Department of Health Education and Welfare in the US federal government. Enthoven sought to “change financial incentives by creating a system of competing health plans in which physicians and consumers can benefit from using resources wisely” (Enthoven, 1978, 1980).¹ Over time, this simple idea was developed by Enthoven himself (e.g., Enthoven, 1989, 1993) and further refined and operationalized in specific contexts by others (e.g., Enthoven and Van de Ven, 1993; Van de Ven et al., 2013; Cutler, 1994). Section 1.2.1 summarizes the main ideas from this stream of literature. A key feature of Enthoven’s model is that competition between health plans operates at the individual (or family) level. In Section 1.2.2 we call attention to a second major intellectual theme within a broadly defined regulated competition approach which relies on health plan competition at the group level. This later idea originates with Peter Diamond (1992), an economist at MIT and an expert in social insurance. Section 1.3 documents how regulated health insurance markets today reflect the ideas of both Enthoven and Diamond.

1.2.1 Evolution of the Enthoven Model: Individual-Insurance Markets Managed by a Sponsor-Regulator

The original proposal (Enthoven, 1980) as well as the modified proposals for 1990s (Enthoven and Kronick, 1989) were developed for national policy in the United States. In Health Plan, Enthoven (1980) called his approach the Consumer Choice Health Plan (CCHP), and described it succinctly as follows:

The most important principles …. are multiple choice and fixed-dollar subsidies. Once a year, each family (or individual) would have the opportunity to enroll for the coming year in any of the qualified health plans operating in its area. The amount of financial help each family gets toward the purchase of its health plan membership – from Medicare, Medicaid, employer, or tax laws – would be the same whichever plan it chooses. The subsidy might be more for poor than for nonpoor, for old than young, for family than individuals, but not more for people who choose more costly health plans. The family that chooses a more costly plan would pay the extra cost itself. Thus it would have an incentive to consider the cost. In addition, physicians would be organized in competing economic units (most would participate in one or another alternative delivery system), so that the premium each group charged would reflect its ability to control costs. (p. xxii, emphases in original)

Enthoven was adamant about the principle of a subsidy to each individual/family independent of their plan choice, as this was critical to create incentives for consumers to choose less expensive plans, and therefore critical for creating incentives to plans to cut costs so as to be able to lower premiums and increase enrollment.

Enthoven’s original vision differs from contemporary models of regulated competition based on individual health insurance in two main ways. First, health plans in the original Enthoven model were paid directly by enrollees. A central authority might subsidize purchases, but there was no sponsor collecting funds, risk-adjusting the funds, and then disbursing them to plans. In the late 1970s, when Enthoven first developed his ideas, there was nothing like the risk adjustment formulas available today to use as a basis for health plan payment. Instead of risk rating in plan payments from a central fund, the Enthoven model relied on a simple demand-side risk rating. Specifically, Enthoven proposed allowing insurers to charge more “to people in categories with higher average medical costs”:

I propose a modified system of community rating called ‘community rating by actuarial category.’ The idea is to require insurers to charge the same premiums for the same benefits to all persons in the same demographic category, such as ‘adults aged forty-five to sixty-five,’ but to allow higher premiums to be charged to people in categories...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• List of Contributors
• Regulated Competition in Health Insurance Markets: Foreword by Alain Enthoven
• Acknowledgments
• Part I: Theory
• Part II: Practice
• References for Part I
• Index