Measuring Selection Incentives in Managed Care: Evidence From the Massachusetts State Employee Insurance Program

Capitation gives insurers incentive to manipulate their offerings to attract the healthy and deter the sick. We calculate the incentives for such service‐specific quality distortions using managed care medical and pharmacy spending data for fiscal years 2001 and 2002 from the Massachusetts State Employee Insurance Program. Services most vulnerable to stinting are cardiac care, diabetes care, and mental health and substance abuse services. Empirically, the financial temptation to distort service quality increases nonlinearly with supply‐side cost sharing. Our empirical results highlight how selection incentives work at cross‐purposes with efforts to reward excellent chronic disease management. Initiatives coupling pay‐for‐performance with risk adjustment and mixed payment hold promise for aligning incentives with quality improvement.