Adjusting Capitation Rates Using Objective Health Measures and Prior Utilization

by Joseph P. Newhouse, Willard G. Manning, Emmett B. Keeler, Elizabeth M. Sloss

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Several analysts have proposed adding adjusters based on health status and prior utilization to the adjusted average per capita cost formula. This Note, reprinted from Health Care Financing Review, Vol. 10, No. 3, Spring 1989, estimates how well such adjusters predict annual medical expenditures among non-elderly adults. Both measures substantially improve on the variables currently used. If only health measures are added, 20-30 percent of the predictable variance is explained; if only prior use is added, more than 40 percent is explained. The results support including some measure of use in the formula until better health measures are developed.

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