Discretionary hospital use and diagnostic risk adjustment of Medicare HMO capitation rates

The health maintenance organization (HMO) industry has expressed concern th at implementation of a diagnostic risk adjustment model based solely on dia gnoses from inpatient hospitalizations will penalize Medicare HMOs that hav e been successful in controlling costs by reducing discretionary hospitaliz ations. This study compares the diagnostic composition of HMO and fee-for-s ervice (FFS) hospitalizations in four states to test the proposition that l ower Medicare HMO hospital admission rates are the result of lower rates of "high-discretion" hospitalizations. The empirical findings show very littl e difference in the proportion of Medicare HMO and FFS hospitalizations wit h principal diagnoses rated as high discretion, and do not suggest that Med icare HMOs have been more successful in reducing discretionary hospitalizat ions than nondiscretionary ones.