RISK ADJUSTMENT OF MENTAL-HEALTH AND SUBSTANCE-ABUSE PAYMENTS

This study used 1992 and 1993 data from private employers to compare t he performance of various risk adjustment methods in predicting the me ntal health and substance abuse expenditures of a nonelderly insured p opulation. The methods considered included a basic demographic model, Ambulatory Care Groups, modified Ambulatory Diagnostic Groups and Hier archical Coexisting Conditions (a modification of Diagnostic Cost Grou ps), as well as a model developed in this paper to tailor risk adjustm ent to the unique characteristics of psychiatric disorders (the ''como rbidity'' model). Our primary concern was the amount of unexplained sy stematic risk and its relationship to the likelihood of a health plan experiencing extraordinary profits or losses stemming from enrollee se lection. We used a two-part model to estimate mental health and substa nce abuse spending. We examined the R-2 and mean absolute prediction e rr or associated with each risk adjustment system. We also examined th e profits and losses that would be incurred by the health plans sewing two of the employers in our database, based on the naturally occurrin g selection of enrollees into these plans. The modified Ambulatory Dia gnostic Groups and comorbidity model performed somewhat better than th e others, but none of the models achieved R2 values above .10. Further more, simulations based on actual plan choices suggested that none of the risk adjustment methods reallocated payments across plans sufficie ntly to compensate for systematic selection.