Health-based risk adjustment has long been touted as key to the success of competitive models of health care. Because it decreases the incentive to enroll only healthy patients in insurance plans, risk adjustment was incorporated into Medicare policy via the Balanced Budget Act of 1997. However, full implementation of risk adjustment was delayed due to clashes with the managed care industry over payment policy, concerns over perverse incentives, and problems of data burden. We review the history of risk adjustment leading up to the Balanced Budget Act and examine the controversies surrounding attempts to stop or delay its implementation during the years that followed. The article provides lessons for the future of health-based risk adjustment and possible alternatives.

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