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How does Risk-selection Respond to Risk-adjustment? Evidence from the Medicare Advantage Program

Listed author(s):
  • Jason Brown


    (Department of the Treasury)

  • Mark Duggan


    (Department of Economics, University of Maryland)

  • Ilyana Kuziemko


    (Department of Economics, Princeton University)

  • William Woolston


    (Department of Economics, Stanford University)

Medicare administers a traditional public fee-for-service (FFS) plan while also allowing enrolles to join government-funded private Medicare Advantage (MA) plans.We model how selection and differential payments - the value of the capitation payments the firm receives to insure an individual minus the counterfactual cost of his coverage in FFS - change after the introduction of a comprehensive risk adjustment formula in 2004. Our model predicts that firm screening efforts along dimensions included in the model ("extensive-margin" selection) should fall, whereas screening efforts along dimensions excluded ("intensive-margin" selection) should increase. These endogenous responses to the risk-adjustment formula can in fact lead differential payments to increase. Using individual-level administrative data on Medicare enrollees from 1994 to 2006, we show that while MA enrollees are positively selected throughout the sample period, after risk adjustment extensive-margin selection decreases whereas intensive-margin selection increases. We find that differential payments actually rise after risk-adjustment, and estimate that they totaled $23 billion in 2006, or about six percent of total Medicare spending.

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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 10-024.

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Date of creation: Apr 2011
Handle: RePEc:sip:dpaper:10-024
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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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