Health status adjustments for Medicare capitation.

The issue of biased selection has taken on increased importance because of the growing numbers of Medicare beneficiaries enrolled in capitated systems. One way to deal with biased selection is through adjusting payment to health plans to reflect enrollee health status. This paper reviews proposed health status adjustors based on perceived health status, functional health status, health service use, program entitlement data, mortality, and risk factors. There is evidence that almost all of these could perform better in a statistical sense than the current Medicare HMO payment formula. For policy purposes, the most practical adjustors at present are measures based on prior use of services. These could be tested and perhaps implemented now as work proceeds on other adjustors.