A new prevention paradox: the trade-off between reducing incentives for risk selection and increasing the incentives for prevention for health insurers

Abstract

The Dutch risk equalization scheme has been improved over the years by including health related risk adjusters. The purpose of the Dutch risk equalization scheme is to prevent risk selection and to correct for predictable losses and gains for insurers. The objective of this paper is to explore the financial incentives for risk selection under the Dutch risk equalization scheme. We used a simulation model to estimate lifetime health care costs and risk equalization contributions for three cohorts (a smoking; an obese; and a healthy living cohort). Financial differences for the three cohorts were assessed by subtracting health care costs from risk equalization contributions. Even under an elaborate risk equalization system, the healthy living cohort was still most financially attractive for insurers. Smokers were somewhat less attractive, while the obese cohort was least attractive. Lifetime differences with healthy living individuals (revenues minus costs) were modest: €4840 for obese individuals and €1101 for smokers. Under a simple form of risk equalization these differences were higher, €8542 and €4620 respectively. Improvement of the risk equalization scheme reduced the gap between costs and revenues. Incentives for undesirable risk selection were reduced, but simultaneously incentives for health promotion were weakened. This highlights a new prevention paradox: improving the level playing field for health insurers will inevitably limit their incentives for promoting the health of their clients.