The analyses presented in Chapter 7 and Chapter 8 address the ability of leading risk-adjustment systems to predict expenditures for individuals with potentially disabling chronic conditions. The first study (Chapter 7) includes a wide range of physical conditions and a composite measure of psychological illness. The second study (Chapter 8) focuses on psychological conditions alone in order to test whether common risk-adjustment methods will successfully predict expenditures in behavioral care carve-out arrangements. While the first study focuses on the prediction of total expenditures, the second study focuses on the prediction of expenditures for treatment of psychiatric disorders, since only psychiatric-related expenditures would be covered by a behavioral care carve-out arrangement.
The studies follow a similar pattern. We use 1994 and 1995 data from large employers to identify a sample of privately insured people with chronic and potentially disabling conditions. We describe the expenditure characteristics of a sample of people with chronic and potentially disabling conditions in this population. We estimate the predicted expenditures of this population using leading risk-adjustment systems and evaluate their predictive ability by comparing predicted to actual expenditures. Finally, we simulate the impact of risk-adjustment on health plans' financial gains or losses.
The following section provides a general introduction to leading risk-adjustment systems, including their purpose and details of their construction.