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Structuring Health Insurance Markets

Risk Adjustment Mechanisms


John Bertko, PM-Squared, Inc.

Michael Rothman, Consultant, Denver, CO.

Under traditional pricing schemes insurers have a financial incentive to avoid enrolling persons they perceive to be "high risks" because there are large differences in cost for individuals with different health status. Yet, there are certain health plans/providers that are natural "magnets for sick individuals. The theory behind risk adjustment is to pay health plans according to the needs of members, and let the plans choose how to deliver care efficiently.

John Bertko gave a detailed overview of risk adjustment methods, including:

  • Those used for commercial enrollees (e.g., ambulatory care groups, used in Minneapolis by the Buyers Health Care Action Group (BHCAG); marker diagnoses developed by the Health Insurance Plan of California (HIPC); and diagnostic cost groups).
  • Those used for managed Medicaid enrollees (e.g., diagnostic payment system—developed by Rick Kronick of the University of California, San Diego).
  • Other methods (e.g., surveys; activities of daily living).

Mr. Bertko revealed some lessons learned about implementation of risk adjustment and advised that simulation is critical for a smooth startup, transition rules may be important, and implementation requires patience and persistence.

Michael Rothman presented Colorado's results with implementing risk adjustment for Medicaid and suggested that four criteria were necessary for picking a technique:

  • Administrative simplicity.
  • Payment accuracy.
  • Desirable incentives
  • Resistance to gaming.

In summarizing his key points, Mr. Rothman's advise for States included:

  • Almost any risk adjustment is better than none.
  • High organizational priority is key.
  • Plan time for education, design , testing, and doing.
  • Results may affect your market substantially (e.g., shift payments to plans with sicker enrollees).


Lee CC, Rogal DL. March 1997. Risk Adjustment: A Key to Changing Incentives in the Health Insurance Market. Health Care Financing and Organization Program Special Report. Washington D.C.: Alpha Center.

Kronick R, Dreyfus A. November 1997. The Challenge of Risk Adjustment for People with Disabilities: Health-Based Payment for Medicaid Programs. Princeton, NJ: Center for Health Care Strategies, Inc.

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