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Risk Sharing Between Competing Health Plans And Sponsors
In many countries, competing health plans receive capitation payments from a sponsor, whether government or a private employer. All capitation payment methods are far from perfect and have raised concerns about risk selection. Paying health plans partly on the basis of capitation and partly on the basis of actual costs ("risk sharing") reduces plans’ incentives for selection but sacrifices some incentives for efficiency. This paper summarizes our empirical research on Dutch health plans with respect to various forms of risk sharing. All sponsors can improve their payment systems by either implementing or changing their form of risk sharing.
Competing health plans in the United States and several European countries receive capitation payments from a sponsor, be it government or a private employer.1 In some settings the capitation payments constitute plans’ entire revenue, while in others the plans may charge members an additional premium. In the latter case, a plan usually has to quote the same premium to each member that chooses the same modality of the specified benefits package.2 Under capitation, a plan has incentives to provide the highest quality of health care at the lowest possible price. However, a plan also has incentives to select individuals that it expects to be profitable ("preferred risk selection"). As far as we know, all practical applications of capitation leave ample room for risk selection. This is especially true for capitation based solely on demographic variables, but it also holds for capitation partly based on diagnostic information from prior hospitalizations.3 The first type of capitation is used by various sponsors in Europe, while the latter type has been applied since 1 January 2000 by U.S. Medicare to pay at-risk health maintenance organizations (HMOs). Obviously, improving capitation methods may reduce incentives for risk selection, but such improvement appears to be difficult for sponsors to achieve. Therefore, some sponsors have decided to pay plans partly on the basis of capitation and partly on the basis of a plan’s actual expenditures. Various names are used for such combinations of prospective and retrospective payment systems: "blended payment systems," "mixed payment systems," "partial capitation," "pooling," and "risk sharing." In this paper we use the latter term.4 We assume that the purpose of risk sharing is to reduce plans’ incentives for selection while retaining their incentives for efficiency as much as possible. The simplest form of risk sharing is that a plan is reimbursed for a certain fraction of all actual costs of all members.5 We refer to this form of risk sharing as "proportional risk sharing." A second form of risk sharing is that health plans are (partially) reimbursed for the expenditures of a member above a certain threshold.6 We refer to this as "outlier risk sharing." As far as we know, the relative strength of these and other forms of risk sharing has not yet been studied. Therefore, we compared the consequences of the two forms of risk sharing mentioned above and those of two alternative forms as well. In our empirical analyses, we use demographic capitation, because this type is widely used, and data are generally available. Moreover, under demographic capitation the selection problem is larger than under the Medicare capitation in use since January 2000. We focus on the question of which form of risk sharing yields the best trade-off between incentives for efficiency and incentives for preferred risk selection. Study assumptions. We assume a regulated competitive health plan market. "Health plans" can be sickness funds, such as in Belgium, Germany, or the Netherlands. They can be HMOs, such as in the Medicare sector in the United States, or they can be (groups of) health care providers that receive capitation payments, such as general practitioner (GP) fund holders in the United Kingdom in the 1990s. The "sponsor" commonly is the government, but it also may be an employer or a group of employers. We assume a specified benefit package that covers short-term care such as hospital care, prescription drugs, and physician services.7 Moreover, we assume that plans may contract selectively with providers of care and that they may offer various insurance modalities of the specified benefit package, provided that each modality covers all specified types of care.8 We assume that plans have to periodically accept any one who wants to buy a modality of the specified benefit package ("open enrollment"). Therefore, consumers can choose the plan and the insurance modality they like the most, on either a mandatory or voluntary basis. Finally, we assume that a plan has to quote the same premium to each member that chooses the same insurance modality. Selection/efficiency trade-off. In the situation described above, health plans can apply various tools to improve the efficiency of care, such as utilization management, disease management, and high-cost case management.9 The potential savings appear to be substantial.10 However, it has been argued that plans may use many (subtle) tools for preferred risk selection, such as the service of the plan; the quality, reputation, and service of its contracted health care providers; the design of the benefit package; and the design of supplemental health insurance policies, selective advertising, and direct mailing.11 Although a plan might gain by selection, it has drawbacks for society as a whole.12 First, access to good health care for the chronically ill may be hindered. Second, efficient plans might lose market share to inefficient plans that are successful with selection. Third, any resources used for selection can be seen as social welfare losses. Given these drawbacks, many are convinced that the prevention of selection is critical to the success of a regulated competitive individual health plan market. It is well known that major incentives for selection exist under capitation based only on demographic variables. With risk sharing, plans’ incentives for selection can be reduced, but some of their incentives for efficiency will be lost. In our empirical analyses, we simulate a health plan’s potential selection gains under various forms of risk sharing as a supplement to demographic capitation. We also simulate which part of various cost reductions a health plan would retain under the various forms of risk sharing. Under demographic capitation without risk sharing, a health plan retains all of the savings, but when risk sharing is employed, a health plan shares the savings with the sponsor. Forms of risk sharing. Risk sharing can take many forms.13 Here we assume that the sponsor would require the risk sharing to be budget-neutral from its own point of view.14 We analyze the two forms of risk sharing mentioned earlier (proportional and outlier) and applied in practice. We also analyze two other forms of risk sharing: one where plans are reimbursed for the expenditures of a small, fixed fraction of their members who actually were the costliest ("risk sharing for high costs") and one where plans are reimbursed for the expenditures of a small, fixed fraction of their members that the plans themselves have designated for risk sharing in advance ("risk sharing for high risks"). Under the latter, plans are allowed to designate those members whom they expect to generate the largest losses, given the capitation payments. As far as we know, neither of these types of risk sharing is currently applied in practice. Prior costs as a risk adjuster. An alternative to risk sharing is to base capitation payments partly on prior costs. A simple way to do this is to reimburse the plans for a certain fraction of their members’ spending in the previous year. This clearly resembles proportional risk sharing. So, a relevant question is whether supplementing a certain capitation formula with (proportional) risk sharing or employing prior-year costs as an additional risk adjuster within the capitation formula yields the same trade-off between selection and efficiency.15
Data. For this study we analyzed administrative data for six consecutive years (1988–1993) for 47,210 members of one Dutch sickness fund. Originally, the data were gathered in the context of a study on capitation payments that were based in part on diagnostic information from previous hospitalizations.16 All members had the same insurance coverage and the same benefits. The data include demographic characteristics, the annual costs for several types of care, and the diagnoses from hospital admissions. For a subset of 10,553 members, health survey data were available as well. Data on annual health care spending included virtually all short-term health care expenditures (including the costs for prescription drugs). The average amount spent on health care in 1993wasU.S.$829 per member.17
Methods.
First, we calculated demographic capitation payments and analyzed the plan’s incentives for selection (Exhibit 1
Finally, we calculated capitation payments based on the demographic variables as well as prior-year expenditures. Subsequently, we compared the plans’ incentives for selection under these capitation payments with those under the demographic capitation payments supplemented with proportional risk sharing (Exhibit 3  ). The weight on actual costs in the latter case was chosen to equal the weight on prior costs in the first case. This way, the plans’ incentives for efficiency are kept constant.
Results. Exhibit 1  shows, for various subgroups, how much the plan would lose on these members, on average, per member. Because the plan can identify these subgroups in advance of the year, these losses are predictable losses. The higher the predictable losses, the higher are the incentives for selection. The exhibit shows the remaining predictable losses after each of four forms of risk sharing is used as a supplement to demographic capitation. For those with the highest costs for prescription drugs two years before, proportional risk sharing reduces the loss from $5,179 to $4,143, and outlier risk sharing reduces it to $3,644. Risk sharing for high costs would reduce the loss to $2,519, and risk sharing for high risks, to $1,483. The latter two forms of risk sharing reduce incentives for selection more than the first two forms do. An advantage of risk sharing for high risks in comparison with risk sharing for high costs is that it yields greater reductions in predictable losses for the subgroups distinguished here.
For each of the four forms of risk sharing, Exhibit 2 A disadvantage of risk sharing for high risks in comparison with risk sharing for high costs is that it apparently retains fewer incentives for efficiency with respect to several subgroups that a plan could choose for the application of disease management. For instance, if the plan reduced the cost for diabetes patients by 20 percent, it would keep 89 percent of the savings under risk sharing for high costs. In the case of risk sharing for high risks, it would keep only 71 percent. Thus, if disease management for the chronically ill is seen as the most promising strategy to improve efficiency of care, risk sharing for high costs may be more appropriate than that for high risks.
Exhibit 3
In many countries competing health plans receive demographic capitation payments from a sponsor. If for whatever reason such capitation payments cannot be improved, the sponsor might consider reimbursing the plans using proportional risk sharing or outlier risk sharing. Our empirical analyses shows that, roughly speaking, these forms of risk sharing yield similar trade-offs between selection and efficiency. More importantly, our analyses show that three other forms of risk sharing yield a better trade-off: risk sharing for high risks, and employing prior costs as an additional risk adjuster. None of these three alternatives yields a uniformly better selection-efficiency trade-off than the others. Limitations of the study. Our study is limited in several ways. First, we assumed that a plan has to quote the same premium to each member who chooses the same insurance modality of the specified benefit package. If this rate restriction is weakened by allowing a plan to vary the premium within a certain minimum and maximum, outlier and proportional risk sharing are still straightforward. However, the two other forms of risk sharing may make premium calculations difficult, because it would be unclear for which part of a potential member’s future costs the plan is at risk. Second, we assumed that a definition of so-called acceptable expenditures within the context of the specified benefit package and cost data are available for at least two consecutive years. The definition of "acceptable expenditures" could become problematic if the specification of the benefit package becomes less detailed and health plans offer many different insurance modalities of the specified package. If cost data are not available for all types of care, it might be possible to use imputed costs (based on health care utilization and imputed prices). Another option would be to limit risk sharing to types of care for which cost data are already available, such as hospital care.18 Third, we assumed that the purpose of risk sharing is to reduce plans’ incentives for selection while maintaining their incentives for efficiency as much as possible. In other studies, the purpose of risk sharing appears to be different.19 If such is the case, different tradeoffs have to be made. Finally, we included four forms of risk sharing in the empirical analyses. Other forms of risk sharing are also possible, such as condition-specific risk sharing.20 However, such risk sharing may result in discussions over which conditions should make members eligible for risk sharing and may induce manipulation by plans. With the forms of risk sharing that we analyzed, this is not the case. Implications for health policy. Given that all current applications of capitation payments leave ample room for risk selection, it is remarkable that most sponsors do not employ any form of risk sharing as a supplement to their capitation payments. In 2001 this is the case in the Czech Republic, Germany, Switzerland, and the United States. Some sponsors have supplemented their capitation payments with either proportional risk sharing or outlier risk sharing (Belgium and the Netherlands). In sum, all countries with a competitive health plan market could improve their methods of paying plans either by implementing some form of risk sharing or by changing the form of risk sharing they now use.
The authors are from the Department of Health Policy and Management, Erasmus University, in Rotterdam, the Netherlands. The authors thank the insurance organization Zorg en Zekerheid for providing the data, L.M. Lamers for valuable comments and her assistance with the data, and three anonymous referees for their valuable comments on a previous draft. Only the authors are responsible for the contents of this paper.
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Empirical Analyses Of Risk...
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