Distributing $800 billion: an early assessment of Medicare Part D risk adjustment

Abstract

The viability and stability of the Medicare Part D prescription drug program depend on accurate risk-adjusted payments. The current approach, prescription drug hierarchical condition categories (RxHCCs), uses diagnosis and demographic information to predict future drug costs. We evaluated the performance of multiple approaches for predicting 2006 Part D drug costs and plan liability. RxHCCs explain 12 percent of the variation in actual drug costs, overpredict costs for beneficiaries with low actual costs, and underpredict costs for beneficiaries with high actual costs. Combining RxHCCs with individual-level information on prior-year drug use greatly improves performance and decreases incentives for plans to select against bad risks.

Exhibit 4. Comparison of Predicted Versus Observed Part D Drug Expenditures, by 5% Groups Based on Observed Expenditures

Source: Authors' analysis Exhibit 4 displays the predicted versus observed expenditures using three risk adjustment approaches, by the level of actual 2006 Part D drug expenditures (20 levels with each representing 5% of the total population). The three approaches are 1) RxHCC alone; 2) RxHCC combined with prior year drug category data; and 3) RxHCC combined with prior year drug expenditure data. The third approach uses 2005 drug expenditures and includes a term for costs². Data points above the diagonal line indicate that predicted expenditures were higher than actual expenditures for the group (over-payment); points below the diagonal indicate that predicted expenditures were lower than the actual expenditures (under-payment).

Exhibit 5. Comparison of Predicted Versus Observed Plan Liability, by 5% Groups Based on Observed Plan Liability

Source: Authors' analysis Exhibit 5 displays the predicted versus observed plan liability using three risk adjustment approaches, by the level of actual 2006 Plan liability (20 levels with each representing 5% of the total population). The three approaches are 1) RxHCC alone; 2) RxHCC combined with prior year drug category data; and 3) RxHCC combined with prior year drug expenditure data. The third approach uses 2005 drug expenditures and includes a term for costs². Data points above the diagonal line indicate that predicted expenditures were higher than actual expenditures for the group (over-payment); points below the diagonal indicate that predicted expenditures were lower than the actual expenditures (under-payment).