Institutional Affiliation: U.S. Department of the Treasury
|How does Risk Selection Respond to Risk Adjustment? Evidence from the Medicare Advantage Program|
with Mark Duggan, Ilyana Kuziemko, William Woolston: w16977
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...
Published: Brown, Jason, Mark Duggan, Ilyana Kuziemko, and William Woolston. 2014. "How Does Risk Selection Respond to Risk Adjustment? New Evidence from the Medicare Advantage Program." American Economic Review, 104(10): 3335-64.