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How Does Risk Selection Respond to Risk Adjustment? New Evidence from the Medicare Advantage Program.

Author(s): Brown, Jason; Duggan, Mark; Kuziemko, Ilyana; Woolston, William

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Abstract: To combat adverse selection, governments increasingly base payments to health plans and providers on enrollees’ scores from risk-adjustment formulae. In 2004, Medicare began to risk-adjust capitation payments to private Medicare Advantage (MA) plans to reduce selection-driven overpayments. But because the variance of medical costs increases with the predicted mean, incentivizing enrollment of individuals with higher scores can increase the scope for enrolling "overpriced" individuals with costs significantly below the formula's prediction. Indeed, after risk adjustment, MA plans enrolled individuals with higher scores but lower costs conditional on their score. We find no evidence that overpayments were on net reduced.
Publication Date: Oct-2014
Citation: Brown, Jason, Duggan, Mark, Kuziemko, Ilyana, Woolston, William. (2014). How Does Risk Selection Respond to Risk Adjustment? New Evidence from the Medicare Advantage Program.. The American economic review, 104 (10), 3335 - 3364
DOI: 10.1257/aer.104.10.3335
ISSN: 0002-8282
EISSN: 1944-7981
Pages: 3335 - 3364
Language: eng
Type of Material: Journal Article
Journal/Proceeding Title: The American economic review
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.



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