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Risk adjustment and prevention


  • Karen Eggleston
  • Randall P. Ellis
  • Mingshan Lu


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

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    References listed on IDEAS

    1. Manning, W. G. & Duan, N. & Rogers, W. H., 1987. "Monte Carlo evidence on the choice between sample selection and two-part models," Journal of Econometrics, Elsevier, vol. 35(1), pages 59-82, May.
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    8. Jack Mintz, 2004. "Conduit Entities: Implications of Indirect Tax-Efficient Financing Structures for Real Investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(4), pages 419-434, August.
    9. Egger, Peter & Larch, Mario, 2008. "Interdependent preferential trade agreement memberships: An empirical analysis," Journal of International Economics, Elsevier, vol. 76(2), pages 384-399, December.
    10. Alfons J. Weichenrieder, 2005. "(Why) Do we need Corporate Taxation?," CESifo Working Paper Series 1495, CESifo Group Munich.
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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health


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