Risk-adjusted capitation payments for catastrophic risks based on multi-year prior costs

In many countries regulated competition among health insurance companies has recently been proposed or implemented. A crucial issue is whether or not the benefits package offered by competing insurers should also cover catastrophic risks (like several forms of expensive long-term care) in addition to non-catastrophic risks (like hospital care and physician services). In 1988 the Dutch government proposed compulsory national health insurance based on regulated competition among insurers as well as among providers of care. The competing insurers should offer a benefits package covering both non-catastrophic risks and catastrophic risks. The insurers would be largely financed via risk-adjusted capitation payments. The government intended to use a capitation formula that is, besides some demographic variables, based on multi-year prior costs. This paper presents the results of an explorative empirical analysis of the possible consequences of such a capitation formula for catastrophic risks. The main conclusion is that this formula would be inadequate because it would leave ample room for cream skimming. Copyright (C) 1997 Elsevier Science Ireland Ltd.