Health system design: A financial perspective

With prospective payment becoming more common in medical services, measuring the costs of risk is gaining importance. This paper derives a stylized mathematical model which addresses the risk transfer from the insurer to the provider in the Swiss DRG system. Similar to the Value-at-Risk concept in financial industries, we ask how to adjust the premium of the provider or the insurer such that the risk of financial loss is bounded. By focussing on the risk-transfer we are able to understand the basic strategies of risk mitigation for both agents. Results indicate that the two parties are exposed to different risks. The risk exposure of the provider´s income is unexpectedly high and strongly depends on its portfolio selection while it remains small for the insurer. General providers offering basic services are likely to make substantial losses whereas specialized health clinics might profit from adverse patient selection.