By Ilyana Kuziemko, Katherine Meckel and Maya Rossin-Slater

National Bureau of Economic Research, Working Paper 19198, July 2013

Abstract

Increasingly in U.S. public insurance programs, the state finances and regulates competing, capitated private health plans but does not itself directly insure beneficiaries through a public fee-for-service (FFS) plan. We develop a simple model of risk-selection in such settings. Capitation incentivizes insurers to retain low-cost clients and thus improve their care relative to high-cost clients, who they prefer would switch to a competitor. We test this prediction using county transitions from FFS Medicaid to capitated Medicaid managed care (MMC) for pregnant women and infants. We first document the large health disparities and corresponding cost differences between blacks and Hispanics (who make up the large majority of Medicaid enrollees in our data), with black births costing nearly double that of Hispanics. Consistent with the model, black-Hispanic infant health disparities widen under MMC (e.g., the black-Hispanic mortality gap grows by 42 percent) and black mothers’ pre-natal care worsens relative to that of Hispanics. Remarkably, black birth rates fall (and abortions rise) significantly after MMC—consistent with mothers reacting to poor care by reducing fertility or plans discouraging births from high-cost groups. Implications for the ACA exchanges are discussed.

From the Introduction

In summary, under MMC, infants whose costs are likely to exceed the capitation payment die more frequently, experience worse health outcomes, receive diminished care, or are not born at all.

From the Conclusion

Introducing risk-adjustment could potentially address the risk-selection results we have presented, though, historically, governments have been reluctant to risk-adjust based on race. Adjusting based on past health conditions is very challenging in the MMC setting and, as previously noted, is rarely attempted. First, plans would have to submit some accounting of their clients’ health conditions to the government, so “intensive” coding becomes a problem, as it is in Medicare Advantage and the Medicare Prospective Payment System. Second, while Medicare can calibrate a risk-adjustment formula by regressing enrollee costs on dummies for past health conditions using cost and claims data from its FFS pool, state governments under MMC typically do not have a public FFS option and thus will not have the cost and claims data that Medicare uses. Third, risk-adjustment formulae typically document existing health conditions using twelve months of pre-data, and use this information to forecast costs for the following twelve months. A stable client population – as in Medicare – is thus required, a challenge in Medicaid given the “churning” of the client base.

Each of these three challenges would seem to apply equally to the ACA state exchanges. Regulators will rely on insurers’ accounting of client health conditions, and as there is no public FFS option they will not have their own cost and claims data. And as the exchanges serve those too rich for Medicaid but not so well off as to have employer insurance, their clients will likely come and go based on outside options – if their situation improves, then they will move into employer insurance; if their situation deteriorates, then they may need to switch to Medicaid.

With Medicaid Managed Care, the ACA exchanges, Medicare Part D and the prominence of Medicare premium-support proposals, the U.S. is moving rapidly toward providing public health insurance through a model of competing, capitated private insurance plans. Past work has identified challenges associated with this model, including the increase in costs that come with insurers losing monopsony bargaining power over providers and consumers’ cognitive overload from choosing among a large set of options. Our work points to an additional concern arising from consumer choice – it tempts insurers to under-serve high-cost clients in the hope they will switch to a competitor.

http://www.nber.org/papers/w19198

Comment:

By Don McCanne, M.D.

The conclusions of this study are shocking, even if predictable.

It has already been established that private Medicare Advantage plans engage in surreptitious activities that result in enrollment of lower-cost, healthier patients, while both avoiding higher-cost patients, and engaging in behaviors that cause higher-cost patients to disenroll (cherry picking and lemon dropping). This shifts higher-cost patients to the traditional public Medicare program, while the private insurers increase profits by continuing to game risk selection.

This study is different because all of the Medicaid patients who were formerly insured through a public program were transferred to private Medicaid managed care programs. Thus there was no public program where the private plans could dump their high-cost patients. So what did they do? They dumped them on their private Medicaid managed care competitors!

What is particularly shocking is the way they did it. They spent more money on the healthier patients to keep them contented so they would stay in their plans, while reducing spending and giving worse service to their higher-cost patients, ensuring dissatisfaction because of the worse outcomes that the patients suffered. Particularly distressing to advocates of social justice is that the high-cost patients discriminated against in this Texas study were predominantly black.

This study provides an important lesson for the insurance exchanges being established under the Affordable Care Act. Since a “public option” was rejected, the exchanges will include only private plans competing with each other. What kind of behavior can we expect? The most effective way for the private insurers to dump high-cost patients onto their competitors will be to give them worse care with terrible outcomes, causing their patients to flee. Of course, there is nowhere else to turn except to other private insurers, though some patients might even consider that paying a penalty for remaining uninsured might be a better option. Then again, remaining uninsured is not a realistic option for those who need higher-cost care.

It’s the same old bottom line. We can either have a publicly administered system dedicated to a patient service ethic, or we can have a privately administered insurance system dedicated to a common business ethic, no matter how cutthroat. Aren’t we making the wrong choice?