Managing risk in a risky world

A successful firm knows that its success depends on its knowledge of risk: what it knows and how quickly it can learn new approaches. The popularity of capitation managed care plans is in doubt in many areas, because the rate of innovation in risk adjustment is very slow. Managed care firms fear that implementation of severity adjustments by Medicare in the year 2000 could slash their Medicare rates. Methods to predict insurance risk must be retooled to prevent "cream skimming" discrimination against the sick, reduce stinting (undercare), and reward quality providers. Risk cannot be eliminated, but it can be prospectively analyzed, assessed, and hedged. In the coming world we must convi nce all concerned parties to spread the risks. Payers must take on some risk by paying for the research and development of valid and reliable severity adjustment systems, and they must pay a higher capitated amount for high-cost patients. A new mixed payment system of pure capitation plus prospective payment for high-risk high-cost patients will create a more equitable marketplace. If a health maintenance organization (HMO) does a great high-quality job of treating diabetes, acquired immunodeficiency syndrome (AIDS), or heart disease, it could advertise this fact and not be harmed financially by the resulting influx of high-cost patients.