EXPENDITURE MODELS FOR PROSPECTIVE RISK ADJUSTMENT - CHOOSING THE MEASURE APPROPRIATE FOR THE PROBLEM

Risk adjustment models for health care expenditures typically have bee n disappointing in their predictive ability for individual enrollees. However, practical applications of risk adjustment often involve group s, not individuals. Therefore, model performance on groups of enrollee s may be more meaningful than performance on individuals. The authors propose a new measure of model fit, the sorted-group R-2, which measur es the correlation between predicted and actual cost averages for grou ps of enrollees sorted by risk prior to grouping. The authors use this tool to evaluate four models with different explanatory variables and functional complexities. Results indicate that even a model which per forms poorly for individual subscriber units and for unselected groups can indeed distinguish between groups of subscriber units where there has been moderate risk selection.