The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) includes a number of provisions directing that payments to plans incorporate an assessment of risk. An accurate risk adjustment process is critical from the Medicare program's perspective--in terms of fairly paying plans for the services delivered, allocating funds equitably between private plan beneficiaries and beneficiaries in traditional Medicare, and still maintaining appropriate incentives for plans. The purpose of this project was to assist ASPE in assessing and refining the risk adjustment model under development by CMS. The project was structured around three sets of analyses: to assess databases used in development of the risk adjustment model; to identify and assess sources of information on geographic variation in drug prices; and to assist ASPE in understanding and evaluating the levels of financial risk that drug plans may incur and the incentives that plans may face given the complex bid and payment structure of the MMA. The work described in this report occurred over the period of time in which the risk adjustment model was being developed at CMS. The model went through numerous changes in the course of development and much of NORC's work was conducted using preliminary versions of the model. Thus, while the general implications of the findings are likely to remain the same, the specific results will depend on the final form of the model.
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