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Providing High-Quality Services to Children with Special Health Care Needs (CSHCN) Under Managed Care

Reimbursing Managed Care Organizations (MCOs)

Developing Equitable Arrangements, Risk Adjustment & Risk Sharing


Carol Tobias, M.S., Project Director, Medicaid Working Group, Boston, MA.

Richard Kronick, Ph.D., Associate Professor, Department of Family and Preventive Medicine, University of California at San Diego, and Co-Investigator, Medicaid Working Group, La Jolla, CA.

If managed care plans are to be expected to provide high-quality care to children with special health care needs, it is reasonable that they receive payments that reflect the additional costs associated with serving these high-risk and high-cost children. More equitable payment arrangements between States and managed care plans hold promise to significantly reduce the effects of traditional incentives to avoid enrolling high-cost populations and to under serve such populations once they are enrolled.

In this session, Carol Tobias and Rick Kronick of the Medicaid Working Group discussed the development of risk-adjusted capitation rates for special populations enrolled in managed care.

Carol Tobias explained that four main things are needed in order to set rates:

  1. A definition of the target population.
  2. A definition of the benefits.
  3. A database of service use and expenditures with which to set rates.
  4. An understanding of the potential for adverse selection.

To illustrate the range of definitions and their effects on rate-setting, Tobias used the District of Columbia, Michigan, Massachusetts and South Carolina as case studies. In the area of benefits, Tobias noted that if the benefits are extensive, there is more potential for adverse selection, and in turn, a greater need for risk adjustment.

Rick Kronick focused his presentation on the technical aspects of risk adjustment. He explored the challenges surrounding the development of sensitive risk adjustment factors, and the advantages and disadvantages of alternative methodologies based on factors, including:

  • Demographic variables.
  • Functional health status.
  • Prior expenditures.
  • Program enrollment.
  • Diagnosis.

Dr. Kronick presented two examples of risk adjustment methodologies developed by the Medicaid Working Group, one used in developing Michigan's capitated system for CSHCN as well as the Disability Payment System. Overall, in order to make capitation work, he feels it is necessary to set appropriate rates for CSHCN, write a demanding contract, and monitor plan quality.


Kronick R, Dreyfus T, Lee L, Zhou Z. Diagnostic Risk Adjustment for Medicaid: The Disability Payment System. Health Care Financing Review Spring 1996;17(3):7-33.

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