Extreme Under and Overcompensation in Morbidity-Based Health Plan Payments: The Case of Switzerland

Abstract: In 2020, the Swiss insurer payment model will include a set of sophisticated morbidity indicators in the form of Pharmaceutical Cost Groups (PCGs), added to a payment model currently largely based on age, gender, and crude morbidity indicators. Adding powerful risk adjustors reduces underpayment for previously highly underpaid groups but creates a new group of the highly overpaid. We characterize the diseases and patterns of health care spending in the top .1% and 1% of the highly underpaid and the bottom .1% and 1% of the highly overpaid in the new Swiss payment model. The under and overpaid share some of the same health conditions, among them kidney disease. The highly underpaid account for a massively disproportionate share of the unexplained variance in the new payment model. Membership in the tails of the distribution of spending residuals after risk adjustment is persistent, implying that the highly over and underpaid merit special attention in design of insurer payment models.