How Does Risk Selection Respond To Risk Adjustment? Evidence From The Medicare Advantage Program
Governments often contract with private firms to provide public services such as health care and education. To decrease firms' incentives to selectively enroll low-cost individuals, governments frequently "Risk-adjust" payments to firms based on enrollees' characteristics. The authors model how risk adjustment affects selection and differential payments - -the government's payments to a firm for covering an individual minus the counterfactual cost had the government directly covered her. They show that firms reduce selection along dimensions included in the risk-adjustment formula, while increasing selection along excluded dimensions.