In 1995 and 1996, the California Managed Risk Medical Insurance Board, Sacramento, Calif., developed a risk-adjustment mechanism that was applied to small employer group health insurance purchasers in the Health Insurance Plan of California (HIPC), the first statewide health insurance purchasing cooperative for small employers (three to 50 employees).
This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO).
To identify high-risk and high-cost health conditions, the researchers examined inpatient data over a one-year period for diagnoses with higher than average costs (more than $15,000) and predictability. When an insurer's aggregate risk varied more that 5 percent from the average, then risk within HIPC was considered maldistributed and the risk-adjustment process kicked in.
The risk-adjustment mechanism was adopted by the California Managed Risk Medical Insurance Board and used by HIPC in its 1996 and 1997 rate negotiations with participating health plans.