Local availability of physicians' services as a tool for implicit risk selection

Risk adjustment of the allocated health budget to health plans plays a major role in the functioning of competitive social health insurance systems. Whenever the risk adjusted allocation is below the expected marginal cost of care for a given person, incentives for risk selection arise. Since coverage is universal, risk selection must take on implicit forms such as stinting and distorting quality of health services. One of the tools for such selection is to strategically determine the local availability of physicians based on the local population. The Israeli competitive national health insurance scheme includes an age (only)-risk adjustment. We argue that the localities' known characteristics are used by the Israeli managed care organizations (sickness funds) to adjust the availability of and accessibility to community health services. Consequently, we expect strong competition and high availability of services in healthier-than-average (and richer) towns, and weak competition and low availability of services in sicker-than-average (and poorer) towns. The empirical analysis combines data on the reception hours of physicians in five specialties and socio-economic and demographic characteristics (age, mean income, mortality rates etc.) of 60 towns in 2004, and strongly confirms that hypothesis, controlling for several other possible explanations for such findings. Such a situation clearly represents a regulation failure and an inefficient and inequitable geographic allocation of health services.