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Risk adjustment under the Health Insurance Act in the Netherlands – Ministry of Health, Welfare and Sport 2008

2 Purpose of risk adjustment s. 1

2.1 Design of the health care system

The Dutch government wants to create an affordable and accessible health care system that also delivers high quality care. Tension inevitably exists between cost control objectives on the one hand, and universal accessibility and quality on the other. A simple way of saving costs is by limiting the quality or accessibility of care. By using available funds efficiently, however, it is possible to assure quality and accessibility while controlling costs. This requires sufficient efficiency incentives.

2.3 Preventing preferred risk selection and creating a level playing field s. 3

Risk adjustment is a tool the government uses to prevent preferred risk selection. Health insurers receive financial compensation for insured persons with an unfavourable risk profile (like the elderly, chronically ill and people who are incapacitated and have higher health costs). Each year all health insurers receive from the Health Insurance Fund a financial contribution known as the risk adjusted contribution. The size of the contribution depends on the composition of their insured populations. A health insurer with a relatively large number of insured persons with an unfavourable risk profile receives a higher contribution than one with a relatively large number of insured persons with a favourable risk profile. Older insured persons exhibit an unfavourable risk profile, because on average they incur higher medical costs than younger insured persons. So a health insurer gets a higher risk adjustment contribution for older insured persons than for younger ones. See sidebar 1 for an example of two insured persons

If risk adjustment works properly a health insurer will receive risk adjustment payments which equal the higher medical costs of an older or sicker policyholder. Since the insurer is paid more for an older or chronically ill policyholder, the insurer has the resources to invest in the higher costs of such an individual’s care. In this manner, risk adjustment removes the financial incentive to select according to risks or to avoid insuring the sick.

Besides preventing selection according to risks, risk adjustment encourages fair competition between health insurers. Since insurers receive risk-adjusted payments that equal the cost of care for their policyholders, each starts with the same ability to make a profit through efficient practices such as reducing their administrative costs or negotiating better prices for their members with providers. Risk adjustment creates a level playing field for health insurers, regardless of the composition of their insured populations.

2.4 Promoting the efficiency of health care s. 4

If preferred risk selection is not a profitable strategy, health insurers must direct effort and money towards promoting the efficiency of care, rather than towards acquiring or shedding certain groups of insured persons. Health insurers that operate less efficiently (i.e. by purchasing services at a higher price or by organising care less efficiently) than the average health insurer, will be unable to make ends meet with the risk adjusted contribution.

3 Financial structure of risk adjustment s. 6

3.1 Flat-rate premium

Every health insurer in the Netherlands has two revenue sources that cover the cost of the basic insurance package. The first is the flat-rate or nominal premium and the second is the annual risk adjusted contribution paid by the Health Insurance Fund. The flat-rate (or nominal) premiu is charged to policyholders aged 18 or older.

4 Ex-ante adjustment and retrospective compensation

4.1 Ex-ante adjustment

The risk adjustment system is primarily an ex-ante one. Ex-ante means the risk adjusted contribution is determined prior to the calendar year it concerns.

4.2 Retrospective compensation

After the end of the year, health insurers are partially compensated for the costs they incurred for providing care services. Retrospective compensations make a correction for deficiencies in the risk adjustment model

5 Risk profile

5.2 Age and gender

5.3 Source of income

5.4 Region

5.5 Pharmacy Cost Groups

This characteristic is based on the recent use of medicines provided outside hospitals (via public pharmacies and GPs with their own pharmacies). Costs of medicines used in hospitals are included in the hospital prices. Consequently, these costs are not included in the Pharmacy Cost Groups which are used primarily for ambulatory care.

5.6 Diagnostic Cost Groups

PCGs do not identify all insured persons with chronic illness, because some disorders are treated clinically rather than pharmacologically. Moreover, PCGs are based only on use of medicines on an outpatient basis, while some insured persons with chronic illness receive medicines from hospitals. The costs of these treatments and prescribed medicines are not separately identifiable in insurer’s records, because they are included in hospital prices

9. Closing comments s. 16

A number of other countries also use an ex-ante risk adjustment system for health insurers. They include Belgium, Germany, the United States (Medicare programme), Ireland, the Czech Republic, Switzerland and Israel. But the Netherlands is leading the way through its development of its current risk adjustment model, mainly because the methodology explicitly accounts for health characteristics (PCGs and DCGs). The only other place where such an approach exists is in the United States under the Medicare programme. Another feature that makes the Dutch system unique is the central collection of income-linked care premiums.