Risk adjustment and the power of four

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By Diane E. Laurent | 15 March 2012

Risk adjustment models have been extensively used for renewal underwriting in group health markets. The typical risk adjuster output offers a single risk score that represents an individual’s overall health status risk. But segregating risk by service category better represents the differences in utilization and cost within each component, and is an important aspect in actuarial pricing. Inpatient, outpatient, physician, and pharmaceutical services possess different characteristics with respect to the utilization frequency, cost severity, speed of claim payment, and underlying trends.

This article presents the results of two simulation studies that indicate that separating the risk by service category significantly improves profitability.