Including health status in Medicare's Adjusted Average Per Capita Cost capitation formula

Actuarial factors currently comprising Medicare's HMO capitation formula, the Adjusted Average Per Capita Cost (AAPCC), are considered by many researchers to be inadequate as predictors of future period health care costs. While it is often suggested that the formula should incorporate beneficiary health status, no measure of health status suitable for this purpose has yet been identified. The authors present initial results from a study of 1,934 randomly selected Medicare beneficiaries in Michigan. Beneficiaries were surveyed to obtain data on several alternative measures of health status. Medicare claims were used to estimate beneficiary health care costs for periods before and after the survey. In regressions on future period Medicare payments, equations including the AAPCC factors plus a health status measure achieved R2 values ranging from 0.013 to 0.072, depending on the health status measure, compared with an R2 value of 0.003 for the equation with AAPCC factors alone.