Controlling Indirect Selection under Healthcare Reform - Society of ...

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These are the primary variables. Depending upon the specific use, a handful of other variables
may also be included. 40
These variables were chosen over the course of the last approximately 25 years as risk
adjustment slowly emerged within health insurance practice, 41 not because they are the only variables
that can be used to predict healthcare costs, but because they were variables that were and are
available within insurer files for most insureds, generally considered reliable, and less susceptible to
gaming than other potential variables (Dunn, et al., 1996). 42
These are truly important practical
considerations. The problem, however, is that the resulting risk assessment captures only some of the
variables that affect health risk.
2. Omitted Variables
As discussed above, there are two components to health risk: the risk of new conditions and
injuries and the risk associated with a known condition or injury. Today’s risk adjustment models focus
on known conditions and injuries, specifically the conditions and injuries implied by recent (typically one
year) of health insurance claim diagnoses and/or prescription drug codes. The risk of an entirely new
condition or injury or recurrence of an old condition can, for simplicity, be thought of as “incidence”
40 Miscellaneous adjustments related to enrollment status are sometimes made as part of the risk adjustment
process. Medicare adjusts for end stage renal disease (ESRD) status, Medicaid enrollment (“dual eligibility”),
whether the beneficiary was originally disabled, and institutional status (CMS, 2010). Medicaid risk adjustment
typically applies separate factors for people who qualify based on disability versus those who qualify based on
poverty (Kronick, Gilmer, Dreyfus, & Lee, 2000; Yi, undated). Commercial insurers may adjust for benefit design,
cost sharing, and other plan-specific characteristics.
41 Risk adjustment entered health policy discussions in the mid-1980s with the advent of Medicare risk contracting.
It was alleged that the HMO contractors were profiting by collecting an area-average Medicare premium for
insuring particularly healthy enrollees and avoiding expensive enrollees (Newhouse, 1986). There was a surge of
risk adjustment analysis (Ellis, et al., 1996). It was not, however, until 2000 that Medicare instituted its first
attempt at health-based risk adjustment (Pope, et al., 2004).
42 There is no consensus on the criteria for selecting risk adjustment variables. Authors have explored various
criteria for variable selection, applied different names to essentially the same criterion, and debated the relative
importance of the criterion. The early authors included Anderson et al (1986), Ash et al (1989), Gruenberg et al
(1986), and Thomas et al (1983).