RISK ADJUSTMENT - WHERE ARE WE NOW

Risk adjustment is intended to minimize selection of patients or enrol lees in health plans. Current efforts generally are recognized as inad equate, but improvement is difficult. The greatest short-term gain wil l come from introducing diagnostic information, though outpatient diag nosis data are unreliable. Initial efforts may use inpatient data, but this creates incentives to hospitalize people. Even exploiting diagno sis information leaves substantial imperfections. Partial capitation, common in behavioral health, reduces incentives to select patients and stint on services, but current policy resists it, perhaps because pol icymakers misinterpret the lesson of the prospective Payment System. T heoretically, not paying plans more for providing additional services is optimal only if consumers are well informed.