ADDRESSING MARKET SEGMENTATION AND INCENTIVES FOR RISK SELECTION: HOW WELL DOES RISK EQUALISATION IN THE IRISH PRIVATE HEALTH INSURANCE MARKET WORK? ESRI Research Bulletin 2017/05

Abstract

Community rating restricts health insurers from varying premiums based on insurees’ risk profiles. It is a key feature of many health insurance markets. While designed to promote equity, this regulation incentivises insurers to focus on attracting low-risk (profitable) consumers while avoiding high-risk (unprofitable) consumers. This phenomenon is known as “risk selection”. Risk selection has a number of negative consequences, such as market segmentation and poor quality service to high-risk individuals (e.g. the old and sick). It also causes inefficiency where investment focusses on attracting low-risk individuals (e.g. the young and healthy) rather than improving price and quality. The best strategy for reducing risk selection incentives is good risk equalisation. Commonly, this involves providing risk-adjusted premium subsidies to insurers based on insurees’ risk profiles. These subsidies are generally administered through a risk equalisation scheme. Our study investigated the performance of Ireland’s scheme. Despite the liberalisation of the Irish health insurance market in the mid-1990s, bona-fide risk equalisation payments only commenced in 2013. The current risk equalisation system allocates risk-adjusted subsidies to insurers based on the age, sex, level of cover, and hospital utilisation, of insurees