NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Jason Brown, Mark Duggan, Ilyana Kuziemko, William Woolston

NBER Working Paper No. 16977
Issued in April 2011
NBER Program(s):   AG   HC   PE

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.

download in pdf format
   (688 K)

email paper

A non-technical summary of this paper is available in the September 2011 NBER digest.  You can sign up to receive the NBER Digest by email.

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (688 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16977

Jason Brown, Mark Duggan, Ilyana Kuziemko, and William Woolston. “How Does Risk Selection Respond to Risk Adjustment? Evidence from the Medicare Advantage Program” forthcoming in American Economic Review.

Users who downloaded this paper also downloaded these:
Morrison Decisions of Firms and Productivity Growth with Fixed Input Constraints: An Empirical Comparison of U.S. and Japanese Manufacturing
Baicker, Chernew, and Robbins w19070 The Spillover Effects of Medicare Managed Care: Medicare Advantage and Hospital Utilization
Gaynor and Town w17208 Competition in Health Care Markets
Duggan and Hayford w17236 Has the Shift to Managed Care Reduced Medicaid Expenditures? Evidence from State and Local-Level Mandates
Krueger and Kuziemko w16978 The Demand for Health Insurance Among Uninsured Americans: Results of a Survey Experiment and Implications for Policy
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us