"Will risk-adjustment decrease health care costs? New evidence from the Medicare Advantage Program"
August
2011
Publication type: Working paper
Research Archive Topic: Business Economics and Public Policy, Corporate Finance
Abstract
To combat adverse selection, governments increasingly base payments to health plans and providers on enrollees' scores from risk-adjustment formulae. But because the variance of medical costs increases with the predicted mean, incentivizing enrollment of individuals with higher scores can increase the scope for enrolling "over-priced" individuals with costs signifi cantly below the formula's prediction. We show that after Medicare risk adjusted capitation payments to private Medicare Advantage plans, plans enrolled individuals with higher scores but signi ficantly lower costs conditional on their score, and overpayments to plans actually increased. Our results have implications for many cost-control reforms that use risk adjustment.
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