Capital Requirements of Health Insurers Under Different Risk-Adjusted Capitation Payments

29 Pages Posted: 7 Feb 2017

See all articles by Alvaro Riascos

Alvaro Riascos

Universidad de los Andes, Colombia - Department of Economics

Natalia Serna Rodriguez

Universidad EAFIT

Ramiro Guerrero

Centro de Estudios en Protección Social y Economía de la Salud

Date Written: February 2, 2017

Abstract

Defining optimal capital requirements for health insurers is a matter of interest for policy-makers. They determine the insolvency probability of health insurers and the minimum number of enrolees in order to keep insolvency under control. In this paper we develop a methodology for estimating the expected loss per health insurer after considering their specific risk profile and the capitation formula with which they are paid. We assume the expected loss follows a normal distribution within risk pools consisting of a unique combination of long-term disease, age, gender, and location, and then define the minimum capital requirement as the 1st quantile of the loss distribution. An application is made for insurers in the statutory health care system of Colombia. Our results show that under normal expenditures with ex-ante morbidity risk adjustment using long-term disease groups, if capitation payments were conditional on long-term diseases too, riskier insurers should have significantly higher capital requirements compared to those generated by the current government capitation formula, which reimburses only on demographic variables, while less risky insurers should have lower capital requirements.

Keywords: risk based capital; capitation; health insurers; risk adjustment; loss distribution

JEL Classification: I11, I13, I18

Suggested Citation

Riascos, Alvaro and Serna Rodriguez, Natalia and Guerrero, Ramiro, Capital Requirements of Health Insurers Under Different Risk-Adjusted Capitation Payments (February 2, 2017). Documento CEDE No. 2017-06. Available at SSRN: https://ssrn.com/abstract=2912942 or http://dx.doi.org/10.2139/ssrn.2912942

Alvaro Riascos (Contact Author)

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

Natalia Serna Rodriguez

Universidad EAFIT ( email )

Carrera 49 N° 7 sur – 50
Bogotá, Antioquia 00000
Colombia

Ramiro Guerrero

Centro de Estudios en Protección Social y Economía de la Salud ( email )

Colombia

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