wynand van de ven: risk adjustment in the netherlands

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Nuffield, Risk Adjustment Conference 29jun11 1

Nuffield Trust, London

Risk Adjustment in the Netherlands

Nuffield Trust Risk Adjustment Conference

London, 29 June 2011

Wynand PMM van de Venprofessor of health insurance

Erasmus University [email protected]

mailto:[email protected]�

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Agenda

1. Brief introduction to health care in the Netherlands;

2. An overview of how and why risk adjustment techniques were introduced;

3. Challenges and benefits of risk adjustment;

4. Future developments risk adjustment.

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Health Insurance Act: 01jan06• Mandate for everyone in the Netherlands

to buy individual private health insurance from a private insurer;

• Standard benefits package;• Broad coverage: e.g. physician services,

hospital care, drugs, medical devices, rehabilitation, prevention, mental care, dental care (children);

• Mandatory deductible: €170 per person (18+) per year.

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Consumer choice• Annual consumer choice of insurer

and choice of insurance contract:– in kind, or reimbursement, or a

combination;– preferred provider arrangement;– voluntary higher deductible: at most

€670 per person (18+) per year;– premium rebate (<10%) for groups.

• Voluntary supplementary insurance.

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Health Insurance Act: 01jan06• Individual insurer is assumed to be(come) the

prudent buyer of care;• Much flexibility in defining the consumer’s

concrete insurance entitlements;• Selective contracting insurers - providers;• Open enrolment & ‘community rating per

insurer’ for each type of health insurance contract;

• Income-related care allowances per household;• Risk equalization.

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Risk Equalization Fund (REF)

premium (18+)

REF-payment based on risk adjusters

REF

Insured Insurer

Income-related contribution

Gov’t contribution(18-)

(50%)

(45%)

Two thirds of all households receive an income-related care allowance(at most € 1,752 per household per year, in 2011)

)

(5%)

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RE in the NetherlandsIn the Netherlands an individual’s

equalization payment is equal to the predicted health expenses based on the individual’s risk factors and the equalization formula, minus X euro.

X equals 45% of the national average per capita predicted health expenses. (Negative equalization payments imply payments from the insurer to the REF.)

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Risk adjustment: HOW and WHY?

• The crucial question is:How to calculate the risk-adjusted equalization payments?

• Why crucial?Without good risk equalization, given open enrolment and community-rating,the insurers are confronted with incentives for risk selection.

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Selection activities• selective contracting;• limited provider plans (HMOs/PPOs);• other managed care techniques;• design of benefits package;• supplementary health insurance;• selective advertising;• virtual (internet) sickness fund;• employer-related (group) sickness fund;• ……..

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Adverse effects of risk selection

1. A disincentive to be responsive to the preferences of high-risk consumers; selection may threaten good quality carefor the chronically ill;

2. Risk selection is more attractive than improving efficiency; selection may threaten efficiency;

3. Market segmentation; selection may threaten solidarity.

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Criteria for risk adjusters• Appropriateness of incentives:

– No incentives for selection;– Incentives for efficiency;– Incentives for health-improving activities;– No incentives to distort information to the

regulator;• Fairness:

– No compensation for N-type risk factors;– No compensation for risk factors which reflect

underutilization;– Predictive value.

• Feasibility.

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Risk adjusters 2011Age and gender;Source of income;Socio-Economic Status (SES):

12 groups based on interaction of: 4 groups based on average income / address:

• 1 group: if >15 persons per address;• 3 groups based on average income per address,

if not >15 persons per address; 3 age groups;

Region (10 clusters of ZIPcodes, no geographical area’s);23 Pharmacy Cost Groups (PCG’s)

(Comorbidity: > 1 PCG per person allowed);13 Diagnostic Costs Groups (DCG’s)

(No comorbidity: max.1 DCG per person).

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PCGs and DCGs• Pharmacy Costs Groups (PCGs):

A morbidity measure based on information about chronic conditions deduced from the use of outpatient prescribed drugs.

• Diagnostic Cost Groups (DCGs):A morbidity measure base on information about the diseases diagnosed during previous hospitalizations.

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Additional annual REF-paymentRisk Group Additional annual

REF-payment (in €)PCG 0 Reference group 0

1 Asthma / COPD 8762 Epilepsy 10513 Rheumatism 11764 Heart diseases 14955 Crohn’s disease/ c. ulcerosa 15386 Stomach diseases 19327 Diabetes (insuline dependent) 28078 Parkinson 26539 Organ transplants 436310 Cancer 479611 Cystic fibrosis 538212 HIV / AIDS 1145513 Kidney problems 18225

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Additional annual REF-payment Risk Group Additional annual

REF-payment (in €)DCG 0 Reference group 0

7 Brain injury 17359 Colon cancer 226111 Liver disorders 348712 Rectal cancer 363613 Congestive heart failure 357814 Hypertension, complicated 449115 Neurologic disorders 539016 Brain / nervous system cancers 616519 Chemotherapy 759120 Diabetes with chronic complications 728821 Pulmonary fibrosis and brochiectasis 860322 HIV / AIDS 978023 Renal failure / nephritis 24020

Source: Van de Ven et al., 2004

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Challenges, benefits & how further?

How good is the current Dutch formula? Do we need perfect risk adjustment? How to prevent selection?

– Improving risk adjustment;– Risk sharing;– Less severe premium rate restrictions.

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Results (costs and losses in euro)

Subgroup 2001 SizeCosts 2004

Average Predictable losses 2004

Self-reported health status fair/poor 21.2% 3404 541Worst score Physical functioning (SF-36) 10.0% 4469 1140Worst score Social functioning (SF-36) 10.0% 3190 649Restricted in mobility (OECD-score) 14.9% 3740 653Stroke, brain haemorrhage/ infarction 2.6% 4341 943Myocardial infarction 3.3% 4755 789Other serious heart disease 2.3% 4654 926Some type of (malignant) cancer 4.8% 3440 689

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Subgroup 2001 SizeCosts 2004

Average predictable losses 2004

High bloodpressure 15.2% 2961 342Astma, chronic bronchitis, emphysema 8.1% 3182 4603-6 self-reported conditions 22.3% 2848 3337 or more self-reported conditions 2.9% 4833 1461Prescribed drugs (self reported, 2 weeks) 48.2% 2597 220Contact specialist (self reported, 1 year) 39.8% 2586 317Hospitalization (self reported, 1 year) 7.5% 3611 1034Home care (self reported, 1 year) 2.2% 4258 1152

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Subgroup 1997 - 2001 SizeCosts 2004

Average predictable losses 2004

In top-25% highest costs, in 3 of 5 years 5.9% 2537 238In top-25% highest costs, in 4 of 5 years 4.5% 3240 304In top-25% highest costs, in 5 of 5 years 8.2% 6131 1757

Hospitalization in 2 of the 5 years 4.7% 3613 728



Hospitalization in 5 of the 5 years 0.1% 14373 6453Source: Stam and Van de Ven, 2008

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Must risk adjustment be perfect?A workable formula need not be ‘perfect’

because of:1. The costs of selection, including a loss of

reputation;3. Longer-run opportunity costs of selection;4. Periodic improvements of the formula;5. Standard deviation of profits from

selection.Unknown how much imperfection is

acceptable.

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New (potential) risk-adjustersDiagnostic information not only from prior

hospitalization, but also from other prior medical encounters;Indicators of mental illness;A better indicator of disability or functional

impairment (based e.g. on durable medical equipment);Multiyear-DCG’s (rather than one-year DCGs);Multi-year high expenses.

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Risk sharing

An imperfect risk adjustment system may be complemented with a system of risk sharing between the REF and the insurers.

Risk sharing implies that the insurers are retrospectively reimbursed by the REF for some of the costs of some of their members. Tradeoff selection - efficiency.

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Financial risk Dutch health insurersOutpatient expenses

Inpatient expenses

Total expenses

1992 0% 0% 0%1993-1995 3% 3% 3%

1996 20% 9% 13%1997 42% 15% 27%1998 48% 15% 28%1999 63% 16% 35%2000 66% 16% 36%2001 65% 20% 38%2002 65% 24% 41%2003 92% 23% 52%

2004-2007 95% 26% 53%2008 97% 34% 59%2009 96% 47% 67%

2010 / 2011 96% 62% 74%

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Regulation-induced selection

Selection is not inherent to the “competing-insurer model”, but is the result of one possible form of regulation in this model (i.e. open enrollment & community rating) .

Alternative forms of regulation result in other outcomes.

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Imperfect risk equalization…An imperfect risk equalization system may

be combined with a premium bandwidthrather than with community rating.

The additional information insurers have will then be used for premium differentiation rather than for selection.Tradeoff selection - affordability.Low-income high-risk individuals can

receive an premium-subsidy.

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New way of thinkingIn that approach insurers will focus on

efficiency rather than on risk selection, and the chronically ill will become the most preferred clients for efficient insurers, rather than non-preferred ‘predictable losses’.

This will stimulate insurers to contract with providers who have the best reputation for high-quality well-coordinated care for chronically ill people.

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How can we prevent selection?• Improving ex-ante risk equalization;• Risk sharing between the REF and the

insurers: tradeoff selection – efficiency;

• Less severe premium rate restrictions: tradeoff selection - affordability;(High-risk low-income people can be compensated by premium-related subsidies.)

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Complex tradeoff

Given insufficient risk equalization we are confronted with a trade-off between: affordability, efficiency, and the potential effects of selection,

notably low quality care for the chronically ill.

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The proof of the pudding…

The Risk Equalization system is OK if the insurers advertise:

“Chronically ill, please come to us. We have contracted the best doctors specialized in your disease!”

wynand van de ven: risk adjustment in the netherlands

Economy & Finance

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