Risk selection in managed care might exacerbate health disparities

This is a guest post from Adrianna McIntyre, a graduate student studying health policy at the University of Michigan. Adrianna currently blogs at Project Millennial, tweets at @onceuponA, and will be joining TIE soon as the team’s first intern. 

Risk selection in Medicaid managed care (MMC) isn’t well understood, despite a robust literature on managed care plan participation in Medicare. In states that administer Medicaid through pure managed care, there is no public plan (the analog of the Medicare FFS option) to serve as a de facto high-risk pool. Instead, Medicaid insurers may risk-select against one another by trying to shift high-cost patients to competitors.

So, is there evidence that MMC plans engage in this behavior—and if so, at what cost to patient outcomes? That’s the topic of a recent NBER working paper by Ilyana Kuziemko and colleagues. It’s loaded with interesting details, and worth reading in full. The argument for risk selection goes something like this:

[MMC plans] have an incentive to retain low-cost, profitable patients and thus provide them with greater levels of care relative to high-cost patients. By contrast, plans balance two competing incentives in treating a high-cost, unprofitable patient—although reducing the level of care may worsen her outcomes and increase costs in the current period, it will also encourage her to switch to a competitor in the next period … plans in our framework need not be able to predict the costs of enrollees ex-ante or devise a menu of services that encourage the healthy to self-select (though they may also engage in such tactics as well). Instead, they can learn about patient costs and profitability over time and adjust quality of care accordingly based on whether they wish to retain the patient.

Between 1994 and 2012, Texas’s Medicaid program underwent a county-by-county transition from fee-for-service to managed care, creating conditions for a natural experiment. The authors created an event-study design to analyze how health outcomes changed across patient groups, using the staggered roll-out to model the effect of the transition. Critical to the study’s methodology, Texan MMC plans are explicitly encouraged to “use their discretion to tailor many benefits individually”—that is to say, they may offer additional services to clients on a case-by-case basis.

Under the state’s capitation scheme, high-cost births represented a large loss for plans; the study focused on maternal and infant health indicators, comparing changes in outcomes between black and Hispanic patients. The authors were able to determine that these two groups had highly divergent health costs prior to the MMC transition, so race could be used as a proxy for low- vs. high-cost. It’s important to note that the findings do not demonstrate that MMC plans discriminated along racial lines; because insurers have access to individual-level health and expenditure data, they need not use a proxy to identify high-cost beneficiaries.

The notion is that insurers may offer fewer services (or services of lower relative quality) to high-cost patients, encouraging them to seek coverage elsewhere. But varying care and quality would influence health outcomes. Though the authors lacked data on benefit generosity, their model identified some troubling trends following the MMC transition:

Black infants in our data have nearly twice the incidence of serious health problems and are nearly twice as costly as Hispanics, and thus our model predicts their outcomes should diverge even further under MMC. We show that the black-Hispanic mortality, low birth weight and pre-term birth gaps increase by 42, 13 and 22 percent, respectively, after a county switches from FFS to MMC. Quality of pre-natal care and birth procedures generally improve for Hispanics relative to blacks and black birth rates fall substantially after MMC […]

[I]f society wishes to shrink health disparities, then MMC may be inferior to FFS as it transfers health resources away from a group with poor average health. As the returns to health investments are thought to be lower for the healthy than the sick, such a transfer could lower total welfare. Finally, if health insurance is in part meant to smooth the utility consequences of ex-ante differences in health, then, relative to FFS, MMC’s transferring of resources from the sick to the healthy weakens the insurance value of the Medicaid program.

These findings have far-reaching implications for health reform. Most states have embraced MMC over traditional FFS Medicaid (about 75% of current Medicaid beneficiaries are enrolled in managed care), so a majority of the program’s expansion will occur under this model. The authors’ model assumes that enrollees have a choice between at least two MMC plans, which is the case in Texas. Lessons extend beyond Medicaid, though: state insurance exchanges will offer competing selections of private, capitated plans, and consumers are promised a choice of at least two plans under the Affordable Care Act. Guaranteed issue in such a marketplace, for all its advantages, could create the same incentives for displacing high-cost patients.

It’s not clear to me whether exchange plans (or MMC in other states) enjoy latitude to “tailor” benefits for individual beneficiaries like MMC in Texas. Since the feds punted essential health benefits to the states, I imagine that this is a matter of state regulation. Anybody know? Leads appreciated. Absent that, the authors also suggest that quality could be adjusted more implicitly through provider payments.

This is not an indictment of capitated coverage. Though other studies haven’t found evidence that managed care reduces expenditures in Medicaid, our health care system is well acquainted with the host of misaligned incentives that accompany a fee-for-service model. Instead, this is an underappreciated trade-off that presents a conundrum: if we can’t risk-adjust ex-ante—and only 15 states have tried with Medicaid—how do we prevent sicker/more vulnerable patient populations from being marginalized by insurers’ business practices?

To address that, we need a better understanding of the how insurers accomplish risk-selection in Medicaid and private managed care markets, which happens to be a big fat question mark at the moment.

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