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

Jason Brown, Mark Duggan, Ilyana Kuziemko () and William Woolston ()
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Ilyana Kuziemko: Department of Economics, Princeton University
William Woolston: Department of Economics, Stanford University

No 10-024, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: 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.

Keywords: Health; Care; Markets (search for similar items in EconPapers)
JEL-codes: H51 I11 I18 (search for similar items in EconPapers)
Date: 2011-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Working Paper: How does Risk Selection Respond to Risk Adjustment? Evidence from the Medicare Advantage Program (2011)
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