Medicare reimbursement and regression to the mean

There is evidence that Medicare's payment formula for health maintenance organizations (HMO's) overpays or underpays HMO's in cases of biased selection. There is also evidence that costs of biased groups regress toward the population mean cost, so the incorrect payment is temporary. We found that reimbursement regressed toward the mean for cohorts biased on medical use but not for groups biased on demographic factors. In a simulation of HMO-favorable selection, Medicare lost money in the first 3 years, but, because of regression toward the mean, early losses were recouped by the seventh year.