Discretionary hospital use and diagnostic risk adjustment of Medicare HMO capitation rates.

The health maintenance organization (HMO) industry has expressed concern that implementation of a diagnostic risk adjustment model based solely on diagnoses from inpatient hospitalizations will penalize Medicare HMOs that have been successful in controlling costs by reducing discretionary hospitalizations. This study compares the diagnostic composition of HMO and fee-for-service (FFS) hospitalizations in four states to test the proposition that lower Medicare HMO hospital admission rates are the result of lower rates of "high-discretion" hospitalizations. The empirical findings show very little difference in the proportion of Medicare HMO and FFS hospitalizations with principal diagnoses rated as high discretion, and do not suggest that Medicare HMOs have been more successful in reducing discretionary hospitalizations than nondiscretionary ones.