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

Author

Listed:
  • Jason Brown
  • Mark Duggan
  • Ilyana Kuziemko
  • William Woolston

Abstract

Governments often contract with private firms to provide public services such as health care and education. To decrease firms' incentives to selectively enroll low-cost individuals, governments frequently "risk-adjust" payments to firms based on enrollees' characteristics. We model how risk adjustment affects selection and differential payments---the government's payments to a firm for covering an individual minus the counterfactual cost had the government directly covered her. We show that firms reduce selection along dimensions included in the risk-adjustment formula, while increasing selection along excluded dimensions. These responses can actually increase differential payments relative to pre-risk-adjustment levels and thus risk adjustment can raise the total cost to the government of providing the public service. We confirm both selection predictions using individual-level data from Medicare, which in 2004 began risk-adjusting payments to private Medicare Advantage plans. We find that differential payments actually rise after risk adjustment and estimate that they totaled $30 billion in 2006, or nearly eight percent of total Medicare spending.

Suggested Citation

  • Jason Brown & Mark Duggan & Ilyana Kuziemko & William Woolston, 2011. "How does Risk Selection Respond to Risk Adjustment? Evidence from the Medicare Advantage Program," NBER Working Papers 16977, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16977
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    References listed on IDEAS

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    1. Van de ven, Wynand P.M.M. & Ellis, Randall P., 2000. "Risk adjustment in competitive health plan markets," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 14, pages 755-845 Elsevier.
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    Cited by:

    1. Laurence Seidman, 2014. "Medicare For All: A Public Finance Analysis," Working Papers 14-02, University of Delaware, Department of Economics.
    2. Mark Stabile & Sarah Thomson, 2014. "The Changing Role of Government in Financing Health Care: An International Perspective," Journal of Economic Literature, American Economic Association, vol. 52(2), pages 480-518, June.
    3. Newhouse, Joseph P. & McWilliams, J. Michael & Price, Mary & Huang, Jie & Fireman, Bruce & Hsu, John, 2013. "Do Medicare Advantage plans select enrollees in higher margin clinical categories?," Journal of Health Economics, Elsevier, vol. 32(6), pages 1278-1288.
    4. Laurence Seidman, 2013. "Medicare for All," Challenge, Taylor & Francis Journals, vol. 56(1), pages 88-115.
    5. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    6. repec:eee:hapoch:v1_237 is not listed on IDEAS
    7. Paulina Restrepo-Echavarria & Antonella Tutino & Anton Cheremukhin, 2013. "A Theory of Targeted Search," 2013 Meeting Papers 664, Society for Economic Dynamics.
    8. Katherine Baicker & Jacob A. Robbins, 2015. "Medicare Payments and System-Level Health-Care Use: The Spillover Effects of Medicare Managed Care," American Journal of Health Economics, MIT Press, vol. 1(4), pages 399-431, Fall.
    9. Hall Anne E, 2011. "Measuring the Return on Government Spending on the Medicare Managed Care Program," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(2), pages 1-43, January.
    10. repec:hrv:faseco:34330197 is not listed on IDEAS
    11. Baicker, Katherine & Chernew, Michael E. & Robbins, Jacob A., 2013. "The spillover effects of Medicare managed care: Medicare Advantage and hospital utilization," Journal of Health Economics, Elsevier, vol. 32(6), pages 1289-1300.
    12. Pieter Bakx & Frederik Schut & Eddy Doorslaer, 2015. "Can universal access and competition in long-term care insurance be combined?," International Journal of Health Economics and Management, Springer, vol. 15(2), pages 185-213, June.
    13. Lorenz, Normann, 2015. "The interaction of direct and indirect risk selection," Journal of Health Economics, Elsevier, vol. 42(C), pages 81-89.
    14. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, Elsevier.
    15. Buchmueller, Thomas C. & Fiebig, Denzil G. & Jones, Glenn & Savage, Elizabeth, 2013. "Preference heterogeneity and selection in private health insurance: The case of Australia," Journal of Health Economics, Elsevier, vol. 32(5), pages 757-767.

    More about this item

    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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