@techreport{NBERw16977,
 title = "How does Risk Selection Respond to Risk Adjustment? Evidence from the Medicare Advantage Program",
 author = "Jason Brown and Mark Duggan and Ilyana Kuziemko and William Woolston",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "16977",
 year = "2011",
 month = "April",
 URL = "http://www.nber.org/papers/w16977",
 abstract = {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.},
}