Adjusting Medicaid managed care payments for changes in health status

Risk adjustment of managed care organization (MCO) payments is essential to avoid creating financial incentives for MCOs adopting enrollee selection strategies. However, all risk-adjustment methods have an inherent structural flaw that rewards preventable deterioration in enrollee health status and improved coding of disease burden. We propose a payment adjustment to offset this flaw. We use a database of 1,237,528 continuously enrolled beneficiaries to quantify the payment impact of change in enrollee health status over time for enrollees with two common chronic illnesses, hypertension and diabetes. The payment impact caused by the change in enrollee health status across MCOs ranged from +3.67% to -7.27% for enrollees with diabetes and from +5.25% to -7.69% for enrollees with hypertension. The MCO payment impact for diabetes and hypertension ranged from +0.19% to -0.31%. This difference can be used as the basis for creating payment incentives for MCOs to reduce the long-term costs of chronically ill enrollees.