How profitable is risk selection? A comparison of four risk adjustment models

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Abstract
To mitigate selection triggered by capitation payments, risk‐adjustment models bring capitation payments closer on average to individuals' expected expenditure. We examine the maximum potential profit that plans could hypothetically gain by using their own private information to select low‐cost enrollees when payments are made using four commonly used risk adjustment models. Simulations using a privately insured sample suggest that risk selection profits remain substantial. The magnitude of potential profit varies according to the risk adjustment model and the private information plans can employ to identify profitable enrollees. Copyright © 2002 John Wiley & Sons, Ltd.