# 13-017/V (2013-01-17)

Piet Bakx, Erasmus University Rotterdam; Erik Schut, Erasmus University Rotterdam; Eddy van Doorslaer, Erasmus University Rotterdam
risk adjustment, long-term care, managed competition, public insurance
JEL codes:
H51, I11, I13, I18, L13

When public long-term care (LTC) insurance is provided by insurers, they typically lack incentives for purchasing cost-effective LTC. Providing insurers with appropriate incentives for efficiency without jeopardizing access for high-risk individuals requires, among other things, an adequate system of risk adjustment. While risk adjustment is now widely adopted in health insurance, it is unclear whether adequate risk adjustment is feasible for LTC because of its specific features. We examine the feasibility of risk adjustment for LTC insurance using a rich set of linked nationwide Dutch administrative data. Prior LTC use and demographic information are found to explain much of the variation, while prior health care expenditures are important in reducing predicted losses for subgroups of health care users. Nevertheless, incentives for risk selection against some easily identifiable subgroups persist. Moreover, using prior utilization and expenditure as risk adjusters dilutes incentives for efficiency, but using multiyear data may reduce this disadvantage.