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HKS Authors

See citation below for complete author information.

John D. MacArthur Professor of Health Policy and Management, HKS and HSPH; Professor of Health Care Policy, HMS

Abstract

Medicare bases its risk adjustment method for Medicare Advantage plan payment on the relative costs of treating various diagnoses in traditional Medicare. However, there are many reasons to doubt that the relative cost of treating different diagnoses is similar between Medicare Advantage plans and traditional Medicare, including the varying applicability of care management methods to different diagnoses and the varying degrees of market power among suppliers of services to plans. We use internal cost data from a large health plan to compare its cost of treating various diagnoses with Medicare’s reimbursement. We find substantial variability across diagnoses, implying that the current risk adjustment system creates incentives for Medicare Advantage plans to favor beneficiaries with certain diagnoses, but find no consistent relationship between the costliness of the diagnosis and the difference between reimbursement and cost.

Citation

Newhouse, Joseph P., Jie Huang, Richard J. Brand, Vicki Fung, and John T. Hsu. "Structure of Risk Adjustment for Private Plans in Medicare." American Journal of Managed Care 17.6 (June 2011): e231-e240.