A necessary cost-side condition for a firm to implement a cross-subsidization pricing strategy is

Questionable Cross-Subsidies

As discussed in Section Enforcing Cross-Subsidies, MHI can be a means of enforcing cross-subsidies to other members of society. Equity considerations call for subsidies from high- to low-risk types. Also cross-subsidies from high-income to low-income individuals can be justified if these are not implemented through the general tax-transfer system. However, MHI can also lead to cross-subsidies which are difficult to legitimate. For instance, individuals living in the countryside may have to subsidize those in urban areas with good access to medical care. If premiums are not differentiated according to age, then the young will cross-subsidize the elderly. Given the demographic trends in many countries, this can place a high burden on the young.

6.3.1 Effects of Subsidies on Sector Development

One prominent example of cross-subsidization impact, i.e., hurting one sector of the economy at the expense of another, is the imposition of a high electricity tariff on the Indian Railways. The Working Group on Energy Policy in 1980 had recommended electrification of 1000 km of route of railway track every year because of low costs and high efficiency of electrified engines. It is estimated that the cost of energy per 1000 gross tonne km for a diesel engine is 78 rupees, compared to 55 rupees for an electric engine. The cost of operation and maintenance per 1000 gross tonne km for a diesel-based engine is 26.5 rupees, whereas that for an electrified engine is 17.5 rupees. However, because the railways subsidize the residential and agricultural sectors and pay a high electricity tariff, only 550 km of track has been converted per year since 1980. This type of cross-subsidy, apart from exerting a toll on railway finances, undermines system efficiency and clogs up the railway network. More important, it makes the railways dependent on crude oil for operation, a situation not desirable from either the economic or the security point of view.

2.6.2 Risk Sharing Without an External Subsidy

Another way to establish cross-subsidies between health plans is risk sharing. For example, insurers can share in a proportion of claims. An essential difference between risk equalization and risk sharing is that risk equalization is based on some concept of expected claims, while risk sharing takes place on the basis of actual claims. For example, the risk sharing payment (which could be positive or negative) for individual i could be calculated as a share s of the difference between the actual claims for individual i (yi) and the mean actual claims in the population (y¯):

(2.2)RSPi=s(yi−y¯)

Next to “proportional risk sharing” (as applied in Belgium, see Chapter 7: Risk Adjustment in Belgium: Why and How to Introduce Socioeconomic Variables in Health Plan Payment), risk sharing can take a variety of other forms. A well-known method is “reinsurance” or “excess loss compensation,” meaning that insurers share in a proportion of individual-level claims in excess of a certain threshold (as is done in Australia, see Chapter 6: Health Plan Payment in Australia). Another method is that insurers share in a proportion of the average profits and losses per person outside a bandwidth (i.e., “risk corridors”), as formerly applied in the Netherlands (Chapter 14: Health Plan Payment in the Netherlands) and the US Marketplaces (Chapter 17: Health Plan Payment in US Marketplaces: Regulated Competition with a Weak Mandate). Risk sharing can also take the form of a cost-based compensation for specific ex-ante risk types (i.e., “high-risk pooling”). For a discussion of these and other methods, see Chapter 4, Risk Sharing.

6.2.2.2.2 CEO incentives

Using his somewhat different measure of cross-subsidization, Scharfstein (1998) finds that socialism is more pronounced in those diversified firms in which top management has a small equity stake. Palia (1999) comes to a similar conclusion, and also shows that there is more socialism when firms have large (and, he presumes, less effective) boards of directors. These governance-related patterns are consistent with the two-tier agency model of Scharfstein and Stein (2000), though not with the CEO-as-principal models of Rajan, Servaes and Zingales (2000) or Wulf (1999). And once again, these kinds of cross-sectional tests help to address the econometric issues raised by Whited (2001) and Chevalier (2000): even if one believes that Scharfstein’s measure of socialism is biased upwards, it is hard to see why it would be spuriously correlated with top-management ownership.

14.3.1 Regulation of Premiums and Contributions

In order to achieve individual affordability of health plans, the Dutch regulator aims at establishing cross-subsidies from the healthy to the sick (referred to as risk solidarity) and from high-income to low-income people (referred to as income solidarity). Risk solidarity is enforced by the requirement of community-rating per health plan (in combination with risk equalization and risk sharing as will be explained in later sections). Income solidarity is organized by the income-related contribution, which is a fixed percentage of income and has a maximum of about 2900 euros per person per year (in 2017), and by the healthcare allowance, which increases with a lower income and has a maximum of about 1050 euros per year for individuals and about 2050 euros per year for households (in 2017). Depending on political decision making, the precise percentages and maximum values for the income-related contribution and healthcare allowance can (slightly) differ from year to year.

16.5.2.2 Regional Premium Rebates Within the Cantons

Health plan premiums vary among cantons, reflecting differences in demand-side and supply-side factors. To avoid cross-subsidies across cantonal borders, RE contributions are calculated on a cantonal basis (see Section 16.3.2). Because HCE also vary considerably within cantons, health plan premiums may differ among up to three premium regions per canton (see Section 16.2.1). However, due to the regulation of maximum premium rebates premiums may not completely reflect these intracantonal cost differences. On the one hand, these differences can be relatively small resulting in a nonbinding regulation where premium rebates mirror cost differences and incentives to select with respect to region dissolves. On the other hand, the differences can be relatively large, implying that the regulation is binding. In this case, premiums do not fully reflect the cost differences and individuals in regions with below-average HCE cross-subsidize the premium of individuals in regions with above-average HCE. Put differently, the premium in regions with below-average (above-average) HCE exceeds (falls below) the actual costs. Because RE contributions are invariant with respect to regions within the canton, health insurers are incentivized to practice risk selection, i.e., to prefer consumers living in rural regions over consumers living in urban regions.

In principle, there are two solutions to this issue. First, one could weaken the regulation and no longer determine the maximum rebates. Thus, premiums would fully reflect differences in HCE between regions. Second, one could take residual regional cost differences not reflected in premium differences into account in the RE formula, implying that limited premium differences between regions are possible and insurers’ incentives to risk select are neutralized. However, there are currently no reforms planned to alleviate this issue. Quite the contrary, the responsible member of the federal council and head of the FOPH intends to reduce the intracantonal premium differences by decreasing the overall number of premium regions and by reducing the legally accepted premium rebates (Federal Department of Home Affairs, 2016). If successful, risk selection incentives based on intracantonal cost differences are thus very likely to be reinforced.

Abstract

Several European countries have chosen to have a competitive social health insurance market. A major challenge for these countries is to organize the cross subsidies from the low risks to the high risks without creating incentives for inefficiency or for risk selection. In theory good risk equalization is an effective strategy. Because in practice the implementation of good risk equalization is complex, policymakers are confronted with a trade-off between affordability, efficiency, and the adverse effects of risk selection. Although most of the experience in Europe is with risk-adjusted payments to insurers, the relevance of risk-adjusted payments to providers is strongly increasing.

4.3.2 Elimination of negative synergies

The separation of an unrelated business segment may further reduce any negative synergies that exist between the subsidiary and the rest of the firm. Gertner, Powers, and Scharstein (2002) examine whether spinoffs help eliminate value-reducing cross-subsidization in diversified firms. They show that the subsidiary’s investment decisions become much more sensitive to the firm’s investment opportunities after the spinoff. Specifically, the total capital expenditure decreases for firms in low Tobin’s q industries and increases for firms in high q industries. These changes take place primarily for subsidiaries whose operations are unrelated to the parent’s core business and in spinoffs generating higher announcement returns.

Seoungpil and Denis (2004) further find that, prior to the spinoff, parent firms trade at a discount to and invest less in their high-growth (high q) divisions than do their standalone peers. Following the spinoff, however, the diversification discount is eliminated and investments have increased for the high-growth segments. Also, McNeil and Moore (2005) show that subsidiary capital expenditures move toward industry levels after the spinoff, for both previously rationed and subsidized divisions. Announcement returns are greater when parent firms allocate capital in a seemingly inefficient way, defined as rationing high q and subsidizing low q spunoff divisions, as is the reduction in the diversification discount. Overall, the evidence indicates that spinoffs create value by improving the investment decisions in diversified firms.

Allen, Lummer, McConnell, and Reed (1995) propose that spinoffs provide a way to unwind unsuccessful prior acquisitions. They examine a sample of 94 spinoffs in which the spunoff entity previously had been acquired by the parent firm. Their evidence suggests that the original acquisition was value destroying: the average acquisition announcement return is negative both for the acquirer and for the target and bidder combined. Moreover, the spinoff announcement return is positive and negatively correlated to the acquisitions return; that is, the greater the anticipated loss from the acquisition, the larger the expected gain from the spinoff. While not identifying a unique source for the value creation in spinoffs, these results are consistent with the elimination of negative synergies between parent and subsidiary.

Agenda 1: sustainable scholarly publishing

Beyond the open access/commercial publishing dichotomy, there is a question of resourcing models and sustainability. Academics’ time is not well spent playing amateur publisher. The key question is how to build sustainable resourcing models that neither require cross-subsidy of academics’ time nor the unjustifiable and unsustainable cost and price structures of the big publishers, nor punishing author fees. The challenge is to develop new business models, either in the form of academic socialism (institutional support for publishing by libraries or university presses paid for by government or institutions) or lightweight commercial models which do not charge unconscionable author fees, subscription rates or per-article purchase prices.