A note on risk adjustment and fair compensation

This note comments on the application of results from the theory of fair compensation to risk adjustment. It argues that the main flaw of such application lies in the consideration of health plans merely as administrative social agents, through which money flows from a central fund to providers of medical care, ignoring their economic behaviour. However, it is that behaviour which raises the issue of risk selection to begin with. With linear health expenditure function, the fair compensation axiomatic solution is shown to be equivalent to the solution of a simple optimal regulation problem. That equivalence permits the analysis of several further issues related to risk adjustment and to the application of the theory of fair compensation to it. Copyright © 2000 John Wiley & Sons, Ltd.