Risk adjustment and Medicare: taking a closer look.

Medicare's method for reimbursing at-risk managed care plans causes potential problems with selection (when beneficiaries with higher-than-expected costs stay in traditional plans) and stinting (the tendency to underprovide health services). Adjusting payment by diagnosis offers substantial improvement. We favor large-scale demonstrations of diagnosis-based reimbursement. Reducing payment, a Clinton administration proposal, would recoup excess payments in the short run but not address the selection problem, which could reemerge. Selection makes current payments vulnerable to upward spirals. We propose not using traditional Medicare to update reimbursement. Basing some payment on enrollees' actual use addresses selection and stinting. Rather than reinsurance, we propose blending traditional Medicare and risk-adjusted capitation. Ceding some cases to traditional Medicare in advance appears to be useful for terminally ill patients.