Hybrid Risk Adjustment for Total Health Expenditures

Abstract

Objectives: Efficient use of health resources has become a major concern for health policy makers and researchers when health expenditures are continously increasing. Prospective risk adjustment, using ex ante information and relating health expenditures and individual or population characteristics and morbidity, is generally recommended as a tool for controlling the cost and promoting incentives for efficiency in the health provision. However, it also can promote incentives for risk selection. Concurrent risk adjustment, using ex post or actual information on health conditions and costs, improves the access and quality of the health services provision and avoids the incentives for risk selection although it also reduces the efficiency. This paper follows a relatively new literature on risk adjustment in which a mixed formula, using both prospective and concurrent risk adjustment, seeks to maximize the efficiency incentives involved in the prospective risk adjustment and minimize the incentives for selection through a concurrent risk adjustment for high risk individuals suffering a set of specific conditions. Methods: We utilize individual data on total health expenditures, including pharmaceutical, primary care, and hospital and specialised attention expenditures, and health conditions for the population belonging to an integrated healthcare delivery organization in Catalonia in years 2004 and 2005 in order to show the gain of a hybrid risk adjustment versus either an only prospective or only concurrent risk adjustment formula. The individual health conditions are classified by the Clinical Risk Group classification system. Results: Concurrent risk adjustment obtains better results in terms of R-squared than prospective risk adjustment although it decreases incentives for efficiency. However, the use of a hybrid formula with concurrent payments for individuals with specific conditions can solve the problem of selection while incentives for efficiency are maximum for a high proportion of the population. Conclusions: A hybrid risk adjustment system is expected to solve the trade-off between efficiency in provision and the risk selection problem and thus promoting efficient use of health resources. The interest of a hybrid risk adjustment proposal relies also on its feasibility and easy implementation.