A note on risk adjustment and fair compensation

This note comments on the application of results from the theory of fair co mpensation to risk adjustment. It argues that the main flaw of such applica tion lies in the consideration of health plans merely as administrative soc ial agents, through which money flows from a central fund to providers of m edical care, ignoring their economic behaviour. However, it is that behavio ur which raises the issue of risk selection to begin with. With linear heal th expenditure function, the fair compensation axiomatic solution is shown to be equivalent to the solution of a simple optimal regulation problem. Th at equivalence permits the analysis of several further issues related to ri sk adjustment and to the application of the theory of fair compensation to it. Copyright (C) 2000 John Wiley & Sons, Ltd.