The who, what, and why of risk adjustment: a technology on the cusp of adoption

Risk adjustment (RA) consists of a series of techniques that account for the health status of patients when predicting or explaining costs of health care for defined populations or for evaluating retrospectively the performance of providers who care for them. Although the federal government seems to have settled on an approach to RA for Medicare Advantage programs, adoption and implementation of RA techniques elsewhere have proceeded much more slowly than was anticipated. This article examines factors affecting the adoption and use of RA outside the Medicare program using case studies in six U.S. health care markets (Baltimore, Seattle, Denver, Cleveland, Phoenix, and Atlanta) as of 2001. We found that for purchasing decisions, RA was used exclusively by public agencies. In the private sector, use of risk adjustment was uncommon and scattered and assumed informal and unexpected forms. The most common private sector use of RA was by health plans, which occasionally employed RA in negotiations with purchasers or to allocate resources internally among providers. The article uses classic technology diffusion theory to explain the adoption and use of RA in these six markets and derives lessons for health policy generally and for the future of RA in particular. For health policy generally, the differing experiences of public and private actors with RA serve as markers of the divergent paths that public and private health care sectors are pursuing with respect to managed care and risk sharing. For the future of RA in particular, its history suggests the need for health service researchers to consider barriers to use adoption and new analytic technologies as they develop them.