Health-based risk adjustment: is inpatient and outpatient diagnostic information sufficient?

Adequate risk adjustment is critical to the success of market-oriented health care reforms in many countries. Currently used risk adjusters based on demographic and diagnostic cost groups (DCGs) do not reflect expected costs accurately. This study examines the simultaneous predictive accuracy of inpatient and outpatient morbidity measures and prior costs. DCGs, pharmacy cost groups (PCGs), and prior year's costs improve the predictive accuracy of the demographic model substantially. DCGs and PCGs seem complementary in their ability to predict future costs. However, this study shows that the combination of DCGs and PCGs still leaves room for cream skimming.