Very high and low residual spenders in private health insurance markets: Germany, The Netherlands and the U.S. Marketpla
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ORIGINAL PAPER
Very high and low residual spenders in private health insurance markets: Germany, The Netherlands and the U.S. Marketplaces Thomas G. McGuire1 · Sonja Schillo2 · Richard C. van Kleef3 Received: 31 January 2020 / Accepted: 11 August 2020 © The Author(s) 2020
Abstract We study the extremely high and low residual spenders in individual health insurance markets in three countries. A high (low) residual spender is someone for whom the residual—spending less payment (from premiums and risk adjustment)—is high (low), indicating that the person is highly underpaid (overpaid). We begin with descriptive analysis of the top and bottom 1% and 0.1% of residuals building to address the question of the degree of persistence in membership at the extremes. Common findings emerge among the countries. First, the diseases found among those with the highest residual spending are also disproportionately found among those with the lowest residual spending. Second, those at the top of the residual spending distribution (where spending exceeds payments the most) account for a massively high share of the unexplained variance in the predictions from the risk adjustment model. Third, in terms of persistence, we find that membership in the extremes of the residual spending distribution is highly persistent, raising concerns about selection-related incentives targeting these individuals. As our results show, the one-in-a-thousand people (on both sides of the residual distribution) play an outsized role in creating adverse incentives associated with health plan payment systems. In response to the observed importance of the extremes of the residual spending distribution, we propose an innovative combination of risk-pooling and reinsurance targeting the predictively undercompensated group. In all three countries, this form of risk sharing substantially improves the overall fit of payments to spending. Perhaps surprisingly, by reducing the burden on diagnostic indicators to predict high payments, our proposed risk sharing policy reduces the gap between payments and spending not only for the most undercompensated individuals but also for the most overcompensated people. Keywords Health insurance · Risk selection · Risk adjustment · Risk sharing JEL Classification I11 · I13
Introduction Health care spending is non-negative and right skewed with the top 10% and even more so the top 1% of spenders accounting for a disproportionate share of all spending. The National Institute for Health Care Management (NICHM) found, for example, using data from the Medical * Richard C. van Kleef [email protected] 1
Department of Health Care Policy, Harvard Medical School, Boston, USA
2
Institute for Health Care Management and Research, CINCH, University of Duisburg-Essen, Duisburg, Germany
3
Erasmus School of Health Policy & Management, Erasmus University Rotterdam, Rotterdam, The Netherlands
Expenditure Panel Survey for 2014 that the top 5% of spenders accounted for half of all spending, and the top 1% alone accounted for more
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