There may be substantial residual confounding in risk-adjustment models used to evaluate health plan performance due to differences in patient characteristics between plans. This means that they may not be able to accurately or fairly identify differences between plans and should caution policymakers against assuming that risk adjustment is sufficient to isolate real differences in plan performance. These findings are published in Annals of Internal Medicine.

Nearly 70% of the Medicaid-eligible population is enrolled in a Medicaid managed care plan. Managed care plans are private healthcare plans that receive prospective per-enrollee per-month capitation payments from states and are then responsible for managing and paying for enrollees’ health care. Capitation payments to plans are “risk-adjusted”, meaning that they differ to reflect differences in health care needs across patient populations. However, our results suggest that inadequate adjustment for patient risk penalizes plans (and providers) with unobservably higher-risk patients, incentivizes plans and providers to engage in risk-selection strategies that are wasteful and can undermine quality of care, and leads public-reporting initiatives to potentially misinform patients.

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