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An analysis of selectivity bias in the Medicare AAPCC (adjusted average per capita cost)
B Dowd1, R Feldman, I Moscovice
1Institute for Health Services Research, School of Public Health, University of Minnesota, Minneapolis 55455, USA.
Abstract:
Using econometric models of endogenous sample selection, we examine possible payment bias to Medicare Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) risk health maintenance organizations (HMOs) in the Twin Cities in 1988. We do not find statistically significant evidence of favorable HMO selection. In fact, the sign of the selection term indicates adverse selection into HMOs. This finding is interesting, in view of the fact that three of the five risk HMOs in the study have since converted to non-risk contracts.
Insights
This study found no evidence of favorable selection into Medicare risk health maintenance organizations (HMOs). Instead, data suggests adverse selection, where higher-risk individuals were more likely to enroll in these plans.
Area of Science:
- Health Economics
- Econometrics
- Healthcare Policy
Background:
- Medicare's Risk Contracting program, established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), aimed to control costs by allowing private Health Maintenance Organizations (HMOs) to receive payments based on the health status of enrollees.
- Potential payment biases could arise if healthier individuals disproportionately selected into or out of risk contracts, affecting program costs and fairness.
Purpose of the Study:
- To investigate potential payment biases in TEFRA risk HMOs in the Twin Cities during 1988.
- To determine if favorable selection (healthier individuals enrolling) or adverse selection (sicker individuals enrolling) influenced payments.
Main Methods:
- Employed econometric models specifically designed for endogenous sample selection.
- Analyzed data from Medicare TEFRA risk HMOs operating in the Twin Cities metropolitan area in 1988.
Main Results:
- No statistically significant evidence of favorable selection into TEFRA risk HMOs was detected.
- The analysis indicated a statistically significant adverse selection effect, suggesting that individuals with higher healthcare needs were more likely to enroll in these HMOs.
Conclusions:
- The findings challenge the assumption of favorable selection in TEFRA risk HMOs, indicating that adverse selection was a more significant factor.
- The observed adverse selection may have implications for the financial stability and risk adjustment mechanisms of Medicare managed care plans, especially considering that several participating HMOs later transitioned to non-risk contracts.