Can Risk Adjustment Prevent Risk Selection in a Competitive Long-Term Care Insurance Market?

Tinbergen Institute Discussion Paper 13-017/V

41 Pages Posted: 18 Jan 2013

See all articles by Pieter Bakx

Pieter Bakx

Erasmus University Rotterdam (EUR)

Erik Schut

Erasmus University Rotterdam (EUR)

Eddy van Doorslaer

Erasmus School of Economics

Date Written: January 17, 2013

Abstract

When public long-term care (LTC) insurance is provided by insurers, they typically lack incentives for purchasing cost-effective LTC. Providing insurers with appropriate incentives for efficiency without jeopardizing access for high-risk individuals requires, among other things, an adequate system of risk adjustment. While risk adjustment is now widely adopted in health insurance, it is unclear whether adequate risk adjustment is feasible for LTC because of its specific features. We examine the feasibility of risk adjustment for LTC insurance using a rich set of linked nationwide Dutch administrative data. Prior LTC use and demographic information are found to explain much of the variation, while prior health care expenditures are 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 dilutes incentives for efficiency, but using multiyear data may reduce this disadvantage.

Keywords: risk adjustment, long-term care, managed competition, public insurance

JEL Classification: H51, I11, I13, I18, L13

Suggested Citation

Bakx, Pieter and Schut, Erik and van Doorslaer, Eddy, Can Risk Adjustment Prevent Risk Selection in a Competitive Long-Term Care Insurance Market? (January 17, 2013). Tinbergen Institute Discussion Paper 13-017/V, Available at SSRN: https://ssrn.com/abstract=2202170 or http://dx.doi.org/10.2139/ssrn.2202170

Pieter Bakx (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Zuid-Holland
Netherlands

Erik Schut

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Eddy Van Doorslaer

Erasmus School of Economics ( email )

Netherlands

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