How does Risk Selection Respond to Risk Adjustment? Evidence from the Medicare Advantage Program / Jason Brown, Mark Duggan, Ilyana Kuziemko, William Woolston.

Format:

Book

Author/Creator:

Brown, Jason.

Contributor:

National Bureau of Economic Research.

Duggan, Mark.

Kuziemko, Ilyana.

Woolston, William.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16977.

NBER working paper series no. w16977

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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.

Notes:

Print version record

April 2011.