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Does the Medicare Principal Inpatient Diagnostic Cost Group Model Adequately Adjust for Selection Bias?

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Publication Date: January 2002

Publisher(s): Pardee Rand Graduate School

Author(s): Hongjun Kan

Topic: Health (Health care financing)

Type: Report


Objective: To determine whether the principal inpatient diagnostic cost group (PIP-DCG) model adequately adjusts for HMO (health maintenance organization) favorable selection, and, if not, to quantify the model's bias in predicting resource use of HMO enrollees that is due to unobserved selection. Data Sources/Study Setting: Data on hospital use of the elderly Medicare population in the state of California from 1994-1996. Personal characteristics and hospital discharge records of HMO and FFS beneficiaries were obtained from the Centers for Medicare and Medicaid Services and the California Office of Statewide Health Planning and Development. Study Design: A simultaneous equations model of HMO enrollment and subsequent hospital use was used to test whether the PIP-DCG risk factors adequately adjust for selection bias. Simulations were conducted to quantify the magnitude of bias in a naive PIP-DCG model developed on FFS (fee-for-service) data ignoring unobserved selection. Principal Findings: (1) The PIP-DCG model does not fully control for selection bias. Unobserved selection is favorable in the HMO population and adverse in the FFS population even after controlling for the PIP-DCG risk factors. (2) A naive PIP-DCG model developed on FFS data ignoring unobserved selection predicts 28 percent more hospital days for new HMO enrollees than if they had remained in FFS. Conclusions: The PIP-DCG model continues to overpay Medicare + Choice plans. To reduce excess payments, a more comprehensive model that better captures underlying health status is needed.