The prevalence of formal risk adjustment in health plan purchasing

This paper describes the prevalence of formal risk adjustment of payments m ade to health plans by Medicare, Medicaid, state governments, and private p ayers. In this paper, 'formal risk adjustment" is defined as the adjustment of premiums paid to health plans based on individual-level diagnostic or d emographic information. We find that formal risk adjustment is used for abo ut one-fifth of all enrollees in capitated health plans. While the Medicare and Medicaid programs rely on formal risk adjustment for virtually all the ir health plan enrollees, the practice is used for only about 1% of private ly insured health plan enrollees. Our findings raise the question of why re gulators have adopted formal risk adjustment, but private purchasers for th e most part have not.