Objective. To stratify traditional risk-adjustment models by health severity classes in a way that is empirically based, is accessible to policy makers, and improves predictions of inpatient costs.
Data Sources. Secondary data created from the administrative claims from all 829,356 children aged 21 years and under enrolled in Georgia Medicaid in 1999.
Study Design. A finite mixture model was used to assign child Medicaid patients to health severity classes. These class assignments were then used to stratify both portions of a traditional two-part risk-adjustment model predicting inpatient Medicaid expenditures. Traditional model results were compared with the stratified model using actuarial statistics.
Principal Findings. The finite mixture model identified four classes of children: a majority healthy class and three illness classes with increasing levels of severity. Stratifying the traditional two-part risk-adjustment model by health severity classes improved its R2 from 0.17 to 0.25. The majority of additional predictive power resulted from stratifying the second part of the two-part model. Further, the preference for the stratified model was unaffected by months of patient enrollment time.