U.S. Department of Health and Human Services

Diagnostic Risk Adjustment for Medicaid: The Disability Payment System

Executive Summary

Richard Kronick, Tony Dreyfus, Lora Lee and Zhiyuan Zhou

1996

This report was prepared under contract between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and University of California, San Diego. For additional information about the study, you may visit the DALTCP home page at http://aspe.hhs.gov/daltcp/home.htm or contact the ASPE Project Officer, Andreas Frank, at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201. His e-mail address is: Andreas.Frank@hhs.gov.

Medicaid programs are increasingly turning to capitated managed care, not only for adults and children on AFDC who have, to date, dominated Medicaid managed care enrollment, but also for Medicaid disabled recipients with whom health plans have little experience. This article has two purposes. First, we argue that risk adjustment is even more important when contracting with health plans for people with disabilities than when contracting for other populations. Second, this article describes a payment system--the Disability Payment System (DPS)--that state Medicaid programs can use to provide financial incentives so that health plans will seek to excel in providing appropriate services for people with disabilities.

In the first section of this article, we present our findings that indicate the need and potential for risk adjustment for people with disabilities. In the following sections we describe a system of diagnostic categories that can serve as a basis for making payments and the results of their application to Medicaid claims data from Colorado, Michigan, Missouri, New York and Ohio. In the final sections we explore the challenges and merits of implementing a system of payment adjusted by diagnosis.