Adjusting the risk-adjustment: Accounting for variation between organisations in the responsiveness of their expenditure to need

There is concern that basing healthcare budgets on risk adjustment estimates derived from historical utilisation data may reinforce patterns of unmet need. We propose a method to avoid this, based on a measure of how closely local health organisations align resources to the needs of their populations. We refer to this measure as the 'responsiveness of expenditure to need' and estimate it using national person-level data on use of acute hospital and secondary mental health services in England. We find large variation in responsiveness in both services and show that higher expenditure responsiveness in mental health is associated with fewer suicides. We then re-estimate the national risk-adjustment model removing the data from the organisations with the lowest expenditure responsiveness to need. As expected, higher need individuals are estimated to have higher expenditure needs when less responsive organisations are removed from the estimation of the risk-adjustment. Removal of organisations with below-average responsiveness results in the neediest deciles of individuals having an extra £163 (7%) annual need for acute hospital care and an additional £79 (27%) annual need for mental health services. The application of this approach to risk adjustment would result in more resources being directed towards organisations serving higher-need populations.