Managing risk selection incentives in health sector reforms

The object of the paper is to review theoretical and empirical contributions to the optimal management of risk selection incentives (‘cream skimming’) in health sector reforms. The trade-o between eciency and risk selection is fostered in health sector reforms by the introduction of competitive mechanisms such as price competition or prospective payment systems. The eects of two main forms of competition in health sector reforms are observed when health insurance is mandatory: competition in the market for health insurance, and in the market for health services. Market and government failures contribute to the assessment of the dierent forms of risk selection employed by insurers and providers, as the eects of selection incentives on eciency and their proposed remedies to reduce the impact of these perverse incentives. Two European (Netherlands and Spain) and two Latin American (Chile and Colombia) case studies of health sector reforms are examined in order to observe selection incentives, their eects on eciency and costs in the health system, and regulation policies implemented in each country to mitigate incentives to ‘cream skim ’ good risks. Copyright # 1999 John Wiley & Sons, Ltd. KEY WORDS: health systems reform; competition in health service markets; competition in health insurance markets; risk selection; cream skimmin