Selection Incentives for Health Insurers in the Presence of Sophisticated Risk Adjustment

This article analyzes selection incentives for insurers in the Dutch basic health insurance market, which operates with community-rated premiums and sophisticated risk adjustment. Selection incentives result from the interplay of three market characteristics: possible actions by insurers, consumer response to these actions, and predictable variation in profitability of insurance contracts. After a qualitative analysis of the first two characteristics our primary objective is to identify the third. Using a combination of claims data (N= 16.8 million) and survey information (N= 387,195), we find substantial predictable variation in profitability. On average, people in good health are profitable, while those in poor health are unprofitable. We conclude that Dutch insurers indeed face selection incentives. A complete measure of selection incentives, however, captures the correlation between individual-level profitability and consumer response to insurer-actions. Obtaining insight in this correlation is an important direction for further research.