How profitable is risk selection? A comparison of four risk adjustment models

Area of Science:

• Health economics
• Healthcare policy
• Insurance markets

Background:

• Capitation payments in healthcare can incentivize health plans to select enrollees based on expected costs, potentially undermining equitable access.
• Risk-adjustment models are designed to mitigate this selection bias by aligning payments with patient expenditure.
• The effectiveness of current risk-adjustment models in preventing profitable risk selection remains a critical question in healthcare policy.

Purpose of the Study:

• To quantify the maximum potential profit health plans could achieve through enrollment selection.
• To evaluate the impact of different risk-adjustment models on potential selection profits.
• To assess the role of private information in enabling profitable risk selection.

Main Methods:

• Simulations were conducted using a privately insured sample dataset.
• Four common risk-adjustment models were analyzed.
• The study modeled hypothetical gains from selecting low-cost enrollees based on private information.

Main Results:

• Risk selection profits were found to be substantial even with risk-adjustment models in place.
• The magnitude of potential profits varied significantly across the analyzed risk-adjustment models.
• The availability and type of private information influenced the profitability of risk selection.

Conclusions:

• Current risk-adjustment models may not fully eliminate the potential for profitable risk selection by health plans.
• Health plans may still exploit information advantages to gain profits through selective enrollment.
• Further refinements to risk-adjustment models and oversight are likely needed to ensure equitable insurance markets.