Risk Adjustment Schemes in Social Health Insurance: Adjusting for Cost Differences Between Insurance Plans

A risk adjustment scheme (RAS) within social health insurance is designed to prevent insurers from engaging in risk selection. This paper shows that with cost differences between insurance plans as they exist between managed-care and traditional insurance, current RASs create incentives for insurers to use risk adjusters for selecting risk types. We investigate on an alternative RAS, which ties transfers to the average cost levels of plans. This alternative RAS is shown not to induce risk selection; a welfare analysis however reveals that a corresponding reform will generally not result in a welfare gain.