A Framework for the Design of Risk-Adjustment Models in Health care Provider Payment Systems

Prospective payments for health care providers require adequate risk adjustment (RA) to address systematic variation in patients’ health care needs. However, the design of RA for provider payment involves many choices and difficult trade-offs between incentives for risk selection, incentives for cost control, and feasibility. Despite a growing literature, a comprehensive framework of these choices and trade-offs is lacking. This article aims to develop such a framework. Using literature review and expert consultation, we identify key design choices for RA in the context of provider payment and subsequently categorize these choices along two dimensions: (a) the choice of risk adjusters and (b) the choice of payment weights. For each design choice, we provide an overview of options, trade-offs, and key references. By making design choices and associated trade-offs explicit, our framework facilitates customizing RA design to provider payment systems, given the objectives and other characteristics of the context of interest.