The Impact of Utilization Thresholds in Risk Adjustment Systems on Fit and Incentives for Gaming∗

Risk adjustment systems, that reallocate funds among competing health insurers, often use risk adjustors that are based on utilization documented in medical claims. The level of utilization that triggers the adjustor, i.e. the utilization threshold, is frequently chosen implicitly. I show that identifying the threshold levels that maximize fit and minimize the incentive to game the system is an empirical question, unique for each adjustor. I study it in the setting of the U.S. Marketplaces by simulating multiple days’ supply thresholds for ten new adjustors based on the use of prescription drugs. I identify thresholds that would improve the fit for five adjustors increasing the individual fit in the related disease groups by up to 9.6% comparing to the baseline implicit threshold. I define new measures for the incentives to game the drug-adjustors, and show that for some thresholds a tradeoff between fit and gaming-incentives does not exist.