NCPA - National Center for Policy Analysis

A Cost-Cutting Tool for Medicare

February 27, 2003

A Boston University statistician named Arlene Ash has developed computer software that can predict future treatment costs of patients based on what ailments they were treated for in the past. Experts say such a tool could reduce Medicare treatment costs.

  • Medicare is already using the computer model to adjust the payments it makes to private insurers and HMOs that take elderly patients under so-called Medicare + Choice plans.
  • Starting Jan. 1, 2004, 30 percent of Medicare's payments will be "risk adjusted" -- and that figure will rise to 100 percent by 2007, meaning that insurers will get huge sums to take care of very sick elderly people, but minimum payments for seniors who are healthy and robust.
  • Experts see a fundamental flaw in Medicare + Choice programs: since insurers get roughly the same payment from the government for taking on a chronically ill patient as they do from accepting people in good health, "adverse selection" occurs -- which is the practice of shunning the truly sick in favor of the relatively healthy.
  • To predict a patient's cost, Dr. Ash's program uses databases that show which diagnoses tend to lead to the highest costs next year.

Older programs focused on the previous year's costs -- irrespective of the disease or procedure -- leading to inaccurate predictions for patients who suffered serious but transient illnesses or underwent one-time treatments.

But factoring in the nature of the prior illness should give Medicare and insurers a clearer picture of what treatments will be needed in the future and their costs.

Source: Peter Landers, "Medicare Plans to Reward HMOs Treating Sickest Patients," Wall Street Journal, February 20, 2003.

For text (WSJ subscription required),,SB1045691685297076103-search,00.html


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