Risk equalization and prevention

Abstract Many countries with a competitive health insurance market have implemented a risk equalization system with health-based risk adjusters. An often-heard argument is that health-based equalization payments create a penalty on prevention and health-improving activities, because an insurer that improves its members’ health status by effective prevention and good quality care will receive lower future revenues. Eggleston et al. (Can. J. Economics/Revue Canadienne d’economique. 45(4), 1586–1607, (2012)) and Kanters et al. (Soc. Sci. Med. 76, 150–158, (2013)) conclude that perfect prospective risk equalization entirely removes an insurer’s incentives for prevention. The goal of this paper is to refute their conclusion. Based on theoretical counterarguments it can be concluded that in the case of both perfect and imperfect health-based prospective risk equalization, insurers have substantial incentives for prevention and health-improving activities. While an insurer bears the full costs of prevention and health promotion activities and may miss some of the future returns, there is empirical evidence that sophisticated (but not perfect) health-based prospective risk equalization does not, in practice, prevent insurers from (1) voluntarily offering coverage for various forms of prevention, (2) voluntarily providing preventive services, and (3) offering their enrollees good quality care, and - thereby - improving the health status of their enrollees. With concurrent (or retrospective ) risk equalization insurers are likely to have less incentives for prevention than with prospective risk equalization.