Abstract

This paper sheds light on some unexpected consequences of health insurance regulation that may pose a big challenge to insurers’ risk management. Because mandated uniform contributions to health insurance trigger risk selection efforts risk adjustment (RA) schemes become necessary. A good deal of research into the optimal RA formula has been performed (Ellis and Van de Ven [2000]). A recent proposal has been to add ”Hospitalization exceeding three days during the previous year” as an indicator of high risk (Beck et al. [2006]). Applying the new formula to an individual Swiss health insurer, its payments into the RA scheme are postdicted to explode, reaching up to 13 percent of premium income. Its mistake had been to successfully implement Managed Care, resulting in low rates of hospitalization. The predicted risk management response is to extend hospital stays beyond three days, contrary to stated policy objectives also of the United States.