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

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III. CAPITATION AND RISK ADJUSTMENT
A. Problem Statement
Under capitation and prepayment, insurers in a competitive market will seek to enroll
those with lower costs and avoid those with higher costs. Appropriate risk adjustment
mechanisms are needed to avoid such practices. Children with special health needs (as
compared to adults) pose unique challenges for setting capitation rates and adjusting for risk.
Many of their conditions are of low prevalence and wide variation exists in severity and
service needs. Certain conditions with higher prevalence -- behavioral, emotional, and
developmental conditions - often have been treated by a variety of publicly funded providers
and undertreated by medical providers, making it difficult to obtain complete and reliable prior
cost estimates for their treatment. Moreover, certain specialized health and related services are
often carved-out of benefit packages, making computation of capitation rates and risk
adjustment more difficult. Most importantly, unlike the adult field, there has been little
research or modeling of appropriate risk adjustment mechanisms for children.
As more state <strong>Medicaid</strong> agencies move to enroll all children in fully capitated plans,
carefully defining this population becomes more critical for reimbursement purposes. Many
states identify only SSI-eligible children for risk adjustment and miss the substantial number of
AFDC and foster care children with chronic conditions. Given the difficulties associated with
obtaining reliable capitation and risk adjustment estimated for children with chronic conditions
and the limited research on setting pediatric capitation rates and adjusting for risk, it is critical
for state <strong>Medicaid</strong> agencies and other purchasers to examine a variety of risk-sharing methods
and contractual requirements to avoid problems.
B. Examples of Current Research and Innovative Approaches
At least four classification systems have been developed for setting capitation rates,
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