Risk-Adjusted Capitation Rates for Children: How Useful Are the Survey-Based Measures?

Public insurance programs for children, including Medicaid and SCHIP, have increasingly relied on contracting with managed care as a mechanism of cost containment. For example, Medicaid managed-care enrollment as a fraction of total Medicaid enrollment increased from 56 percent in 1999 to 71 percent in 2008 (CMS 2008). As capitation rates paid to managed-care plans in most states are not adequately risk adjusted for high-cost children, the plans have incentives to engage in risk selection—encouraging enrollment of low-risk, low-cost children (i.e., cream skimming) while discouraging enrollment of high-risk, high-cost children (i.e., dumping). To protect children who are expected to have high costs, some experts have proposed a number of mechanisms to reduce health plans' incentives for risk selection (Fletcher 1999; Feder et al. 2001;), including the use of risk-adjusted capitation rates to reflect the expected cost of child enrollees. Most published studies of risk adjustment, however, have centered on adults, especially the elderly enrolled in Medicare managed-care plans. Few risk-adjustment models have been estimated specifically for children (Newhouse et al. 1993; Fowler and Anderson 1996; van de Ven and Ellis 2000; Hwang, Ireys, and Anderson 2001;). This study aims to fill the information gap by evaluating the performance of risk-adjustment models for children. In particular, we extend the current literature in two ways. First, we estimate risk-adjustment models for children using survey measures, which have the potential to improve capitation rates for the elderly with chronic conditions (Zaslavsky and Buntin 2003) but have not been included in pediatric risk-adjustment models yet. Second, we compare the predictive power of different risk adjusters for all children, and specifically for children with special health care needs (CSHCN; see McPherson et al. 1998), who can be identified through parents report in household survey. To our knowledge, our paper is the first study of risk adjustment for CSHCN. In particular, we examine whether adding CSHCN information into risk-adjustment models improves the models' predictive power. We pay particular attention to CSHCN for three reasons. (i) The past two decades have witnessed an increase in the number of CSHCN. Recent studies have shown that 10.2 million American children had special health care needs in 2005, compared with 9.4 million in 2001 (Blumberg 2003). (ii) CSHCN have been considered especially vulnerable in the current marketplace dominated by managed-care plans because they have poorer health status, used more health services, and incurred higher expenditures than other children (Newacheck and Taylor 1992; Fox and Newacheck 1993; Neff and Anderson 1995; Edmunds and Coye 1998; Liptak et al. 1998; Newacheck et al. 2000; Stein 2001; Szilagyi et al. 2003; Newacheck and Kim 2005; Liptak et al. 2006;). (iii) CSHCN have drawn intense attention from policy makers. For example, meeting the needs of CSHCN was established as an important public health objective for the nation as indicated by the Healthy People 2010 (Department of Health and Human Services 2000). In addition, a key priority identified by the federal Maternal and Child Health Bureau stated that “Families of CSHCN will have adequate private and/or public insurance to pay for the services that they need” (McPherson et al. 2004). In this paper, we first evaluate the performance of different risk adjusters for children and then analyze how they could affect payments for health plans (capitation rates) serving CSHCN. Finally, we will discuss implications of our study findings and identify directions for future work.