How Does Risk Selection Respond to Risk Adjustment? New Evidence from the Medicare Advantage Program

Area of Science:

• Health economics
• Public health policy
• Healthcare management

Background:

• Governments use risk adjustment to set payments for health plans and providers.
• Medicare Advantage (MA) plans use risk adjustment to mitigate selection bias and overpayments.

Purpose of the Study:

• To evaluate the effectiveness of Medicare's risk adjustment policy implemented in 2004.
• To determine if risk adjustment successfully reduced overpayments by preventing enrollment of high-risk, low-cost individuals.

Main Methods:

• Analysis of enrollment data and medical costs in Medicare Advantage plans post-risk adjustment.
• Assessment of the relationship between enrollee risk scores and actual medical costs.

Main Results:

• Medicare Advantage plans enrolled individuals with higher risk scores after policy implementation.
• Enrollees with higher risk scores exhibited lower medical costs than predicted by the risk-adjustment formula.
• No evidence was found to support a net reduction in overpayments.

Conclusions:

• Risk adjustment in Medicare Advantage may inadvertently incentivize the enrollment of individuals with lower-than-predicted costs.
• The current risk-adjustment model may not effectively control for adverse selection or reduce overall overpayments.
• Policy adjustments may be necessary to improve the accuracy and fairness of Medicare Advantage payments.