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Risk adjustment and prevention

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  • Karen Eggleston
  • Randall P. Ellis
  • Mingshan Lu

Abstract

Widespread integration of market-based incentives into healthcare systems calls for - and has elicited - increasing adoption of risk adjustment. By deterring selection, risk adjustment helps to assure fair and efficient payments among health insurers or capitated provider groups. However, since conventional risk adjustment allocates funds among regions or insurers according to current population health status, it does not reward - indeed, it penalizes - preventive efforts that improve population health. This prevention penalty of risk adjustment represents a hidden cost of unclear magnitude, undermining provider incentives for health promotion. We develop a theoretical model of selection and prevention demonstrating this problem with conventional risk adjustment and suggesting a simple alternative: risk adjustment should be linked to pay-for-performance for prevention.

Suggested Citation

  • Karen Eggleston & Randall P. Ellis & Mingshan Lu, 2012. "Risk adjustment and prevention," Canadian Journal of Economics, Canadian Economics Association, vol. 45(4), pages 1586-1607, November.
    • Handle: RePEc:cje:issued:v:45:y:2012:i:4:p:1586-1607
    DOI: 10.1111/j.1540-5982.2012.01747.x
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    1. Anell, Anders & Dackehag, Margareta & Dietrichson, Jens & Ellegård, Lina Maria & Kjellsson, Gustav, 2022. "Better Off by Risk Adjustment? Socioeconomic Disparities in Care Utilization in Sweden Following a Payment Reform," Working Papers 2022:15, Lund University, Department of Economics, revised 12 Mar 2024.

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