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

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.Health Care Markets

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

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.

Strategies for Reining In Medicare Spending Through Delivery System Reforms: Assessing the Evidence and Opportunities

Outlines promising measures to achieve savings in Medicare costs by reducing the need for hospitalization and readmission and by reducing disparities across physicians and geographic areas in care delivery, utilization, and expenditures

The Medicare Physician Group Practice Demonstration: Lessons Learned on Improving Quality and Efficiency in Health Care

Discusses the experiences of ten large practices earning performance payments for improving the quality and cost-efficiency of health care delivered to Medicare fee-for-service beneficiaries

Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans

Medicare Part D provides prescription drug coverage through Medicare approved plans offered by private insurance companies and HMOs. In this paper, we study the role of current prescription drug use and health risks, related expectations, and subjective factors in the demand for prescription drug insurance. To characterize rational behavior in the complex Part D environment, we develop an intertemporal optimization model of enrollment decisions. We generally find that seniors' choices respond to the incentives provided by their own health status and the market environment as predicted by the optimization model. The proportion of individuals who do not attain the optimal choice is small, but the margin for error is also small since enrollment is transparently optimal for most eligible seniors. Further, there is also evidence that seniors over-react to some salient features of the choice situation, do not take full account of the future benefit and cost consequences of their decisions, or the expected net benefits and risk properties of alternative plans.

The Center for Medicare and Medicaid Innovation: Activity on Many Fronts

Provides an overview of the Innovation Center's organization, differences from CMS's traditional demonstration authority, payment and delivery reform initiatives, and first-year efforts to solicit and promote new ideas and collaborate with other payers

Bundling Payment for Episodes of Hospital Care: Issues and Recommendations for the New Pilot Program in Medicare

Outlines the 2010 healthcare reform's provision to launch a pilot project for bundling Medicare payments around hospitalization episodes of care, the rationale for hospital episode bundling, and guidance on designing an effective pilot program

Long-Term Cost of the America's Healthy Future Act of 2009; As Passed by the Senate Finance Committee

Estimates the impact of the Senate Finance Committee's healthcare reform bill on health insurance coverage rates and net spending by federal, state, and local government with offsets; private employers; and families of various ages from 2010 through 2019

The Role of Exchanges in Quality Improvement

Explores state options and considerations for driving healthcare quality improvement and delivery system reform at the plan and provider levels through insurance exchanges, including the need to involve all stakeholders in developing and executing policy