Improving risk-equalization in Switzerland: Effects of alternative reform proposals on reallocating public subsidies for hospitals.

The Swiss healthcare financing system is on the verge of one of its largest reforms. The Swiss parliament is currently debating how to reallocate about 20 % of total health expenditures. Swiss cantons make substantial tax-funded contributions to health expenditures by paying 55 % of hospital inpatient costs. As health insurers are fully responsible for all outpatient costs, the present system may provide unintended incentives to treat patients in inpatient settings. This paper presents and evaluates three alternative reform proposals for the reallocation of the cantonal contribution. Two proposals are currently under consideration in the Swiss parliament, suggesting either partial cost-sharing (20 %) of all healthcare costs or inclusion of cantonal contributions into the risk-equalization fund. A third option is developed in this paper, which proposes using the cantonal funds to pay a share of insurer's expenses above a high-cost threshold. The high-cost risk-sharing alternative is clearly superior: it mitigates the incentive to discriminate against sicker individuals, improves incentives for cost control, and reduces risk of loss for insurers. The paper adds results from Switzerland to an international literature on the properties of adding high-cost risk sharing to a risk equalization model.