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How Does Risk Selection Respond to Risk Adjustment? New Evidence from the Medicare Advantage Program

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  • Jason Brown
  • Mark Duggan
  • Ilyana Kuziemko
  • William Woolston

Abstract

To combat adverse selection, governments increasingly base payments to health plans and providers on enrollees' scores from risk-adjustment formulae. In 2004, Medicare began to risk-adjust capitation payments to private Medicare Advantage (MA) plans to reduce selection-driven overpayments. 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 "overpriced" individuals with costs significantly below the formula's prediction. Indeed, after risk adjustment, MA plans enrolled individuals with higher scores but lower costs conditional on their score. We find no evidence that overpayments were on net reduced.

Suggested Citation

  • Jason Brown & Mark Duggan & Ilyana Kuziemko & William Woolston, 2014. "How Does Risk Selection Respond to Risk Adjustment? New Evidence from the Medicare Advantage Program," American Economic Review, American Economic Association, vol. 104(10), pages 3335-3364, October.
    • Handle: RePEc:aea:aecrev:v:104:y:2014:i:10:p:3335-64
    Note: DOI: 10.1257/aer.104.10.3335
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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