To study the extent to which risk equalization (RE) in competitive health insurance markets can be improved by including an indicator for being healthy.
This study is conducted in the context of the Dutch individual health insurance market. Administrative data on spending and risk characteristics (2011‐2014) for the entire population (N = 16.6 m) as well as health survey data from a large sample (N = 387 k) are used.
The indicator for being healthy is low spending in three consecutive prior years. “Low spending” is defined in three ways: belonging to the bottom 60%, 70%, or 80% of the annual spending distribution. Versions of the Dutch RE model 2017 with and without the indicator are compared on individual‐level payment fit and, using the survey data, group‐level payment fit.
All three alternative models outperform the Dutch RE model 2017. However, significant unpriced risk heterogeneity remains. Compared with the 60% threshold, the 80% threshold comes with a larger improvement in fit but identifies a less selective group.
The performance of the RE model can be improved by adding an indicator for being healthy based on multiple‐year low spending. However, risk‐selection potential remains, warranting high priority to further improvement of RE.
Study Setting/Data Sources