The role of risk adjustment in national health reform

Efforts to contain health insurance costs through competitive strategies are undermined by the economic incentive facing buyers and sellers to avoid high-risk individuals. To deal with this problem, proponents of competitive strategies, in which cost containment would be achieved by having consumers move to the most efficient health plans, suggest developing risk-assessment methods and using them to make transfer payments from plans enrolling relatively healthier people to plans with relatively sicker ones. Effective risk adjustment is also of interest to payers such as Medicare, large employers offering multiple-choice programs, and risk-bearing providers seeking fair compensation. So far, however, the ability to predict the variability of future medical costs on an individual basis is very limited. In a market in which individuals are free to change plans annually, the potency of current risk-adjustment technology would leave plans with ample incentive to attract healthier people and to avoid sicker people. The state of current risk-assessment methods leads some analysts to advocate a mixed payment system, partly based on a risk-adjusted prospective payment and partly based on retrospective adjustments made once competing plans' actual experiences are known. New York State is trying such an approach. Many analysts emphasize the importance of other insurance reforms and the institutional framework in which risk adjustments might be made as key factors in helping such a process succeed.(ABSTRACT TRUNCATED AT 250 WORDS)