Setting capitations for Medicaid: a case study

Health Care Financing Review, Summer, 1990 by Arleen Leibowitz, Joan L. Buchanan

Adjustment for trend

Because of general price increases, medical costs will be higher at the time the rates apply than they were in the base period used to calculate rates. To account for this, it is necessary to estimate the rate of cost increases. NYS obtained a measure of the rate of increase in Medicaid claims by regressing the logarithm of average monthly claims on month of service. This was done separately for ADC and SSI. In order to use the most recent data available, NYS based the monthly rate calculation on summaries of the Medicaid claims data for the 18-month period from August 1983 to March 1985. Apparently, there was no correction for as yet unfiled claims, although such a correction was made to March 1985 claims in the rate group calculation.

The adjustment for cost increases was accomplished with a "midpoint to midpoint" methodology. The rate group averages were based on data covering a 12-month period whose midpoint was April 1984. Rates were projected for a 12-month period whose midpoint was June 1986, a difference of 27 months. Allowing for compound growth during this 27-month period yields an increase in cost resulting from trend of 36.75 percent for ADC and 33.19 percent for SSI.

The adjustment for changes in charges over time accounts for both increases in prices and increases in use of services. This adjustment appropriately reflects increases in technology as well as increases in prices. Since the adjustment is based on statewide averages, however, it also reflects changes in patient mix, which the methodology already partially accounts for. Thus, if the mix of eligibles is shifting over time toward heavier users of services, this would tend to overstate the capitation. If lighter users account for a larger share of Medicaid recipients over time, this will tend to understate the capitation. Basing the trend adjustment on changes in use over time for specific groups, defined in the same way as in the subgroup analysis, could eliminate this potential double counting.

Stop-loss adjustment

A stop-loss provision stipulates that for 1986 New York State would be responsible for all expenditures in excess of $14,500 per year and HCP would be responsible only for the first $14,500 of expenses an individual incurred in a year. Because the FFS expenditure data include all expenses, the total amount of expenditures above $14,500 for any individual were subtracted from the basic data (Tenan 1986). (2) Thus the FFS charges reflect only the portion for which the HMO would be responsible. This adjustment was made separately for each detailed rate group.

The estimated effect of the stop-loss provision fails to account for the trend that causes average expenditures to rise over time. To properly estimate the number of people who can be expected to exceed expenses of $14,500 in 1986, we need to determine the percent of Medicaid recipients who had expenses in excess of $10,603 in the base period. This figure is calculated from New York's estimate of an increase in prices of 36.75 percent between the base period and the midpoint of 1986. Thus, $14,500 in 1986 is equivalent to $10,603 in 1984 ($14,500/(1.00 .3675)).