Working Paper: NBER ID: w16977
Authors: Jason Brown; Mark Duggan; Ilyana Kuziemko; William Woolston
Abstract: Governments often contract with private firms to provide public services such as health care and education. To decrease firms' incentives to selectively enroll low-cost individuals, governments frequently "risk-adjust" payments to firms based on enrollees' characteristics. We model how risk adjustment affects selection and differential payments---the government's payments to a firm for covering an individual minus the counterfactual cost had the government directly covered her. We show that firms reduce selection along dimensions included in the risk-adjustment formula, while increasing selection along excluded dimensions. These responses can actually increase differential payments relative to pre-risk-adjustment levels and thus risk adjustment can raise the total cost to the government of providing the public service. We confirm both selection predictions using individual-level data from Medicare, which in 2004 began risk-adjusting payments to private Medicare Advantage plans. We find that differential payments actually rise after risk adjustment and estimate that they totaled $30 billion in 2006, or nearly eight percent of total Medicare spending.
Keywords: Risk Adjustment; Medicare Advantage; Risk Selection; Public Policy
JEL Codes: H51; I11; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk adjustment (G52) | decreased selection along included dimensions (D79) |
| risk adjustment (G52) | increased selection along excluded dimensions (C34) |
| risk adjustment (G52) | increase in differential payments (J33) |
| differential payments (J33) | total cost to the government (H59) |
| risk adjustment (G52) | changed selection patterns (C24) |