What lessons can we learn from Europe’s health insurance exchanges?

Risk Selection Threatens Quality Of Care For Certain Patients: Lessons From Europe’s Health Insurance Exchanges

By Wynand P. M. M. van de Ven, Richard C. van Kleef and Rene C. J. A. van Vliet
Health Affairs, October 2015


Experience in European health insurance exchanges indicates that even with the best risk-adjustment formulas, insurers have substantial incentives to engage in risk selection. The potentially most worrisome form of risk selection is skimping on the quality of care for underpriced high-cost patients—that is, patients for whom insurers are compensated at a rate lower than the predicted health care expenses of these patients. In this article we draw lessons for the United States from twenty years of experience with health insurance exchanges in Europe, where risk selection is a serious problem. Mistakes by European legislators and inadequate evaluation criteria for risk selection incentives are discussed, as well as strategies to reduce risk selection and the complex trade-off among selection (through quality skimping), efficiency, and affordability. Recommended improvements to the risk-adjustment process in the United States include considering the adoption of risk adjusters used in Europe, investing in the collection of data, using a permanent form of risk sharing, and replacing the current premium “band” restrictions with more flexible restrictions. Policy makers need to understand the complexities of regulating competitive health insurance markets and to prevent risk selection that threatens the provision of good-quality care for underpriced high-cost patients.

Lessons from Europe:

Risk Selection Is A Serious Problem

Examples of selection activities include offering health plans attuned to the preferences of the under- and overpriced insured, opening clinics in regions with healthy populations, closing offices in areas with underpriced high-cost populations, selective marketing to preferred groups, the use of group contracts, and selection of favorable applicants by insurance agents.

The situation is more critical in the United States than in Europe in the short run, because in the United States there are many competing managed care organizations that deliver care themselves and therefore, compared to European insurers, have much more effective and subtle tools to use to distort the level of quality of care. In addition, for-profit insurers in the United States have extensive experience with risk selection.

Risk Adjustment Should Be Improved

Because risk adjusters ideally should fulfill criteria such as appropriateness of incentives, fairness, and feasibility, adding new risk adjusters may involve trade-offs. For example, using a patient’s health care expenses in the previous year as a risk adjuster effectively reduces selection by insurers, but it also reduces the insurers’ incentives for efficiency.

The United States might consider adopting the following risk adjusters that are currently used in Europe: disability, pharmacy-based cost groups, previous use of durable medical equipment, and high costs from multiple prior years.

Invest In Collecting Data

Another lesson for US policy makers is that it is worthwhile to invest in collecting appropriate data. Several of the risk adjusters currently used in Europe required many years of investment in building up appropriate data systems.

Risk Sharing Is An Effective Strategy

Given imperfect risk adjustment, which seems inevitable to a certain extent, an effective strategy for reducing selection incentives is risk sharing. There are several forms of risk sharing. One form is mandatory risk sharing among insurers, which is sometimes referred to as mandatory reinsurance with a community-rated reinsurance premium. Another form is risk sharing between the regulator and the insurers — for example, when a regulator provides cost-based compensations to the insurers for high-cost patients. Because risk sharing also reduces an insurer’s incentive for efficiency, it confronts the regulator with a trade-off between selection and efficiency.

Adopt A Generic Premium Rate Band

Another effective strategy for US policy makers to use in reducing risk selection is to allow insurers to charge their enrollees, within a band or range of acceptable charges, risk-adjusted health insurance premium rates. As a result, the information surplus about enrollees that insurers have over the regulator might be focused on premium rate variation rather than on risk selection.

Understand The Complexities

An important lesson from European experience with health exchanges is that there are no easy solutions and that regulating competitive health insurance markets involves complex trade-offs among selection (through quality skimping), efficiency, and affordability. Another lesson from Europe is that legislators and policy makers can easily make serious mistakes and be misled by incorrect arguments.


Risk Selection Threatens Quality of Care for Certain Patients: Lessons from Europe’s Health Insurance Exchanges

The Commonwealth Fund, October 6, 2015

The Issue

Beginning in the early 1990s, several European countries, along with Israel, established health insurance exchanges similar to those launched in the U.S. as part of the ACA. For a Commonwealth Fund–supported study in Health Affairs, researchers gleaned lessons from those countries on how to reduce incentives to engage in risk selection. Insurers can engage in risk selection by steering away high-risk patients in a variety of ways, including purposefully contracting with doctors or hospitals that offer mediocre or substandard care or excluding providers with the best reputations for treating certain diseases.

The Big Picture

Risk selection may be a more critical issue in the U.S. over the short run. “[I]n the United States there are many competing managed care organizations that deliver care themselves and therefore, compared to European insurers, have much more effective and subtle tools to use to distort the level of quality of care,” the authors write. U.S. insurers also are experienced at identifying medical risk and may use the information at their disposal to design products that are unattractive to high-risk patients—including those with cancer and substance abuse disorders. The high number of consumers choosing health plans in the insurance exchanges may exacerbate the problem. Solving these vexing issues, the authors say, must be made a priority to prevent sick patients from receiving poorer-quality services or reduced access to care.



By Don McCanne, MD

This report, supported by the Commonwealth Fund and published in Health Affairs, looks at European nations that use variations of market exchanges of private insurance plans (Belgium, Germany, Ireland, Switzerland and, especially, the Netherlands) to see what lessons on risk selection they may have for the United States. But are these the right lessons for us?

Private insurers in the United States have long been masters at figuring out ways of insuring the healthy, with their relatively low health care costs, while avoiding insuring individuals with greater health care needs. Although the Affordable Care Act prohibits insurers from refusing to cover individuals anticipated to have higher health care costs, we are seeing insurance innovations in gaming risk selection that substitute for medical underwriting, which sometimes still prevents patients from receiving the care that they should have.

The multi-payer system in the United States is infamous for the very high costs of the wasteful administrative excesses in our health care financing. In fact, some of these excesses are for the very purpose of ensuring the business success of the private insurers. So what efficiencies do the European systems that use marketplace exchanges of private plans have that might help the United States avoid the perversities of favorable risk selection on the part of the insurers?

The authors suggest the introduction of additional risk adjusters (more administration), systems to collect yet more data (more administration), introduction of risk-sharing strategies such as mandatory community-rated reinsurance or risk sharing between the regulator and the insurers (more administration), allowing insurers to charge their enrollees, within a band or range of acceptable charges, risk-adjusted health insurance premium rates (more administration), and balancing trade-offs of quality-skimping selection, efficiency, and affordability (more administration).

Not only would these “lessons” expand the administrative excesses of our system, but because of the trade-offs involved, further compromises in quality and equity would result. No matter what strategies are used, the private insurers will always find a way around them. That is inherent in their business-model DNA.

Instead of us looking for lessons in the European private insurance markets, it seems that these European nations should be looking for lessons from our neighbor to the North: Canada and its single payer model of health care financing. We would do well to do the same.