Economic Analysis Patients

The Clinton proposal recognizes the need for successful risk adjustment and calls for the National Health Board to promulgate a risk adjustment formula by 1 April 1995. Unfortunately, risk adjustment technology is primitive; using observable characteristics such as age only slightly ameliorates the flawed incentives of not adjusting at all. Without major improvements in risk adjustment technology we face a trade-off between giving plans an incentive to select good risks and an incentive to produce at lowest cost. Pure capitation maximizes both incentives; pure fee-for-service minimizes both. I suggest experimentation with paying plans partly on the basis of risk-adjusted capitation and partly on the basis of a fee schedule reflecting actual use (partial capitation). In the draft Clinton plan, the option given to alliances not to offer plans priced above 120 percent of the weighted average premium appears to assume better risk adjustment ability than is now possible. This option should be relaxed or abandoned. Virtually all current health reform proposals, including President Bill Clinton’s Health Security Act, envision a world of competing health plans that receive a fixed premium per person. The premium could vary according to an enrollee’s personal or family characteristics. Characteristics such as age that cause the premium to vary are termed risk adjusters. Thus, if premiums are risk-adjusted, plans might be paid more for enrolling an older person than for enrolling a younger person. Adequate risk adjustment is likely to be critical to the success of the Clinton plan (see Section 1541 of the Health Security Act). Most other major reform proposals also include language about risk adjustment. Indeed, the inability to risk-adjust in a satisfactory fashion lies behind a number of current problems, such as preexisting condition exclusions and redlining in the insurance market for small businesses and the selfemployed. Thus, the following comments are to be construed not as a negative comment on the president’s proposal but rather as a “heads-up” that fully prospective risk adjustment– the usual meaning-is likely to jeopardize goals of access, choice, and cost savings no matter what proposal is enacted. To preview my bottom line, I conclude that we should probably abandon the notion of fully prospective risk adjustment. Joseph Newhouse is John D. MacArthur Professor of Health Policy and Management at Harvard University and directs the Division of Health Policy and Research Education. on S etem er 5, 2017 by H W T am H ealth A fairs by http://conealthaffairs.org/ D ow nladed fom