Medicaid Managed Care - U.S. Senate Special Committee on Aging

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Risk-Adjustment Methods Must Although risk-adjustment mechanisms are designed primarily to prevent
Be Accurate, Free From adverse and favorable selection, implementing a risk-adjustment scheme
Manipulation, and Workable involves a number of other considerations. Risk-adjustment
methodologies must not only be reasonable predictors of future health
care costs, they must also be relatively insulated from manipulation by
health plans or providers, and they must be feasible in terms of
administrative and data requirements.
To prevent adverse or favorable selection, a risk-adjustment mechanism
must be able to predict health care costs. Researchers have demonstrated
that prior utilization and diagnosis-based methodologies can both have
predictive power superior to that of rates based on eligibility category.
Some prior utilization models are able to explain nearly 40 percent of the
variation in health care costs for disabled individuals, and diagnosis-based
models have been able to explain about 25 percent. However, even the
best predictors of health care costs explain less than half the variation in
costs of providing care. Plans then still have an incentive to avoid the
higher-cost members of a rate cell.
The basis selected for risk adjustment can affect the behavior of health
plans.
With utilization models that use cost as a measure, health plans have less
of an incentive to hold down costs because less efficient health plans may
be rewarded with higher capitation rates as participants are characterized
as high use. Conversely, a plan that manages its enrollees' care very
efficiently may be penalized with lower capitation rates in the future.
Moreover, a prior utilization method based on the number of hospital
admissions affects health plan behavior in a different way than one based
on the number of days an individual spends in the hospital. In both cases,
the health plan could manipulate the measure affecting future rates
without necessarily losing much in terms of efficiency.m
With diagnosis-based risk-adjustment methods, 'upcoding" exists in which
providers and plans record the most severe diagnosis-the diagnosis
associated with the greatest capitation adjustment-of those available for
an individual's symptoms. The use of multiple diagnoses as factors in the
rate-setting methodology creates a situation in which providers could
record unwarranted diagnoses to raise future capitation rates.
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