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Johns Hopkins University, Lewin Group. Prepared for Health Care Financing Administration. Fairfax, VA, USA: Lewin Group.
Johns Hopkins University, Baltimore, MD, USA; Lewin Group, Fairfax, VA, USA
As managed care plans compete with each other they strive to maximize their profits (or minimize their costs) primarily in one of two ways, through the efficient delivery of health care services or through favorable risk selection. Greater efficiency, provided that the quality of care is not harmed, reduces the resources devoted to health care and frees up these resources for other more valuable uses. When health insurance plans compete with others to enroll the best risks and avoid enrolling poor risks, society loses because insurance plans earn windfall profits related to their risk selection, not their efficiency. In addition, individuals whose health care expenditures are expected to be high may have difficulty securing insurance coverage and adequate access to care. Because of the problems associated with risk selection and the growing number of people enrolled in managed care, much greater attention has been given to the problems with risk selection as of late.
Researchers and policymakers have focused on a two step process. The first step is to determine the relative risks of enrolled populations. In the second step, the results of the first step, risk assessment, are used to risk adjust premiums received by plans. The goal of this two step process is to encourage managed care plans to compete by improving efficiency, rather than promoting risk selection. The purpose of risk assessment is not to predict all medical expenditures but rather only those that can be predicted using available data and technology. Most of the variation in health care expenditures cannot be explained. This fact underlies the rationale for health insurance. The task of risk adjustment is to improve the functioning of health insurance by paying for predictable health care expenditures, thereby limiting the incentive for or preventing selection in the health insurance market place. Ideally, risk adjustment would transfer revenues from insurers by experiencing favorable selection to their counterparts who experience unfavorable selection. By controlling for selection effects across insurers, risk adjustment reduces or eliminates the incentives for plans to seek out the healthy and avoid the sick.