Risk adjustment of capitation payments to behavioral health care carve-outs: How well do existing methodologies account for psychiatric disability?

This study used 1994–1995 administrative data from a large public employer to examine the viability of commercial risk adjustment systems for setting capitation payments to competing behavioral health care ‘carve-outs’. The ability of Hierarchical Condition Categories and Adjusted Diagnostic Groups to predict psychiatric expenditures was improved by controlling separately for psychiatric disability. However, even the best models underpredicted expenditures of patients with psychiatric disability by 15%. Relative to full capitation, ‘mixed’ payment systems and soft capitation reduce the ability of carve-outs to earn disproportionate profits by enrolling healthy patients and avoiding sick ones, yet also diminish incentives for cost containment.