1. Nuffield Trust, London
Risk Adjustment
in the Netherlands
Erasmus University Rotterdam
Nuffield Trust
Risk Adjustment Conference
London, 29 June 2011
Wynand PMM van de Ven
professor of health insurance
Erasmus University Rotterdam
vandeven@bmg.eur.nl
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2. Agenda
1. Brief introduction to health care in the
Netherlands;
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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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3. Health Insurance Act: 01jan06
• Mandate for everyone in the Netherlands
to buy individual private health insurance
from a private insurer;
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• 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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4. Consumer choice
• Annual consumer choice of insurer
and choice of insurance contract:
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– 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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5. Health Insurance Act: 01jan06
• Individual insurer is assumed to be(come) the
prudent buyer of care;
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• 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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6. Risk Equalization Fund (REF)
Gov’t contribution
(18-)
REF
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(5%)
(50%)
Income-related REF-payment based
contribution on risk adjusters
(45%)
Insured Insurer
premium (18+)
Two thirds of all households receive an income-related care allowance
(at most € 1,752 per household per year, in 2011)
)
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7. RE in the Netherlands
In the Netherlands an individual’s
equalization payment is equal to the
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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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8. Risk adjustment: HOW and WHY?
• The crucial question is:
How to calculate the risk-adjusted
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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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9. Selection activities
• selective contracting;
• limited provider plans (HMOs/PPOs);
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• 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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10. Adverse effects of risk selection
1. A disincentive to be responsive to the
preferences of high-risk consumers;
 selection may threaten good quality care
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for 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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11. Criteria for risk adjusters
• Appropriateness of incentives:
– No incentives for selection;
– Incentives for efficiency;
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– 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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12. Risk adjusters 2011
Age and gender;
Source of income;
Socio-Economic Status (SES):
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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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13. PCGs and DCGs
• Pharmacy Costs Groups (PCGs):
A morbidity measure based on information
about chronic conditions deduced from the
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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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14. Additional annual REF-payment
Risk Group Additional annual
REF-payment (in €)
PCG 0 Reference group 0
1 Asthma / COPD 876
2 Epilepsy 1051
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3 Rheumatism 1176
4 Heart diseases 1495
5 Crohn’s disease/ c. ulcerosa 1538
6 Stomach diseases 1932
7 Diabetes (insuline dependent) 2807
8 Parkinson 2653
9 Organ transplants 4363
10 Cancer 4796
11 Cystic fibrosis 5382
12 HIV / AIDS 11455
13 Kidney problems 18225
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15. Additional annual REF-payment
Risk Group Additional annual
REF-payment (in €)
DCG 0 Reference group 0
7 Brain injury 1735
9 Colon cancer 2261
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11 Liver disorders 3487
12 Rectal cancer 3636
13 Congestive heart failure 3578
14 Hypertension, complicated 4491
15 Neurologic disorders 5390
16 Brain / nervous system cancers 6165
19 Chemotherapy 7591
20 Diabetes with chronic complications 7288
21 Pulmonary fibrosis and brochiectasis 8603
22 HIV / AIDS 9780
23 Renal failure / nephritis 24020
Source: Van de Ven et al., 2004
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16. Challenges, benefits & how further?
 How good is the current Dutch formula?
 Do we need perfect risk adjustment?
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 How to prevent selection?
– Improving risk adjustment;
– Risk sharing;
– Less severe premium rate restrictions.
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17. Results (costs and losses in euro)
Average
Costs Predictable
Subgroup 2001 Size 2004 losses 2004
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Self-reported health status fair/poor 21.2% 3404 541
Worst score Physical functioning (SF-36) 10.0% 4469 1140
Worst score Social functioning (SF-36) 10.0% 3190 649
Restricted in mobility (OECD-score) 14.9% 3740 653
Stroke, brain haemorrhage/ infarction 2.6% 4341 943
Myocardial infarction 3.3% 4755 789
Other serious heart disease 2.3% 4654 926
Some type of (malignant) cancer 4.8% 3440 689
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18. Results (costs and losses in euro)
Average
Costs predictable
Subgroup 2001 Size 2004 losses 2004
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High bloodpressure 15.2% 2961 342
Astma, chronic bronchitis, emphysema 8.1% 3182 460
3-6 self-reported conditions 22.3% 2848 333
7 or more self-reported conditions 2.9% 4833 1461
Prescribed drugs (self reported, 2 weeks) 48.2% 2597 220
Contact specialist (self reported, 1 year) 39.8% 2586 317
Hospitalization (self reported, 1 year) 7.5% 3611 1034
Home care (self reported, 1 year) 2.2% 4258 1152
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19. Results (costs and losses in euro)
Average
Costs predictable
Subgroup 1997 - 2001 Size 2004 losses 2004
In top-25% highest costs, in 3 of 5 years 5.9% 2537 238
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In top-25% highest costs, in 4 of 5 years 4.5% 3240 304
In 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 3 of the 5 years 1.1% 6606 2030
Hospitalization in 4 of the 5 years 0.3% 11763 5933
Hospitalization in 5 of the 5 years 0.1% 14373 6453
Source: Stam and Van de Ven, 2008
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20. Must risk adjustment be perfect?
A workable formula need not be ‘perfect’
because of:
1. The costs of selection, including a loss of
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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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21. New (potential) risk-adjusters
Diagnostic information not only from prior
hospitalization, but also from other prior
medical encounters;
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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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22. Risk sharing
An imperfect risk adjustment system may
be complemented with a system of risk
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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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23. Financial risk Dutch health insurers
Outpatient Inpatient Total expenses
expenses expenses
1992 0% 0% 0%
1993-1995 3% 3% 3%
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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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24. Regulation-induced selection
Selection is not inherent to the
“competing-insurer model”, but is
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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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25. Imperfect risk equalization…
An imperfect risk equalization system may
be combined with a premium bandwidth
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rather 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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26. New way of thinking
In that approach insurers will focus on
efficiency rather than on risk selection, and
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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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27. How can we prevent selection?
• Improving ex-ante risk equalization;
• Risk sharing between the REF and the
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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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28. Complex tradeoff
Given insufficient risk equalization we
are confronted with a trade-off between:
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 affordability,
 efficiency,
 and the potential effects of selection,
notably low quality care for the
chronically ill.
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29. The proof of the pudding…
The Risk Equalization system is OK if
the insurers advertise:
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“Chronically ill, please come to us.
We have contracted the best doctors
specialized in your disease!”
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