Health Care Reform:

Considerations for Risk Adjustment Under Community Rating

HEHS-94-173: Published: Sep 22, 1994. Publicly Released: Oct 25, 1994.

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Pursuant to a congressional request, GAO reviewed various issues regarding risk adjustment under health care reform, focusing on: (1) how the government's past experience with risk adjustment is relevant to recent health care reform initiatives; and (2) the features of health care reform that could affect risk adjustment and selection bias.

GAO found that: (1) the goal of community rating may be compromised unless payments received by insurers are risk adjusted; (2) community rating increases selection bias and reduces insurer competition; (3) although risk adjustment can mitigate the unwanted consequences of community rating, its effectiveness will depend on each health care system's characteristics; (4) the government's past experiences with risk adjustment is insufficient to project which risk adjustment method would be best for any given reform proposal; (5) more complex methodologies may be needed to remove selection bias; (6) although assessing the extent of selection bias under the different reform proposals may help determine whether a simple or complex risk adjustment methodology is more appropriate for a given proposal, such an assessment will be difficult given the size and diversity of each pool of individuals, range of choices available to purchasing groups, and degree to which benefit packages are standardized; (7) uncertainty regarding risk adjustment under health care reform remains because many health care reform proposals are untried; and (8) any risk adjustment efforts need to be flexible and continuously monitored as the health insurance market continues to change.

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