Risk equalization in competitive health insurance markets: Identifying healthy individuals on the basis of multiple-year low spending.

Objective: To study the extent to which risk equalization (RE) in competitive health insurance markets can be improved by including an indicator for being healthy.

Study Setting/data Sources: 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.

Study Design: 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.

Principal Findings: 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.

Conclusions: 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.