Individual Health Risk Classification—basically, the selection of risk factors that would be used to assess risk. This would entail identifying a number of factors that would be predictive of higher, or perhaps lower, next period expenditures. Characteristics that are highly predictive of these expenditures need to be selected. Standard characteristics often selected are age and gender but could also include chronic conditions, disability, and others with high predictive capacity. The problem is that the best predictive model may be extremely complex and include variables that one might not have. Certain considerations need to be introduced when coming up with this classification. These include data limitations, such as availability of a relevant variable and number of observations per risk cell. Also, feasibility considerations, such as complexity, timeliness, and cost, would be important.

The Definition of Appropriate Medical Care Coverage—Expenditure risk should be defined under a standard minimum basket of medical care services. A starting point for this could be the benefits standard introduced under the ACA. Once the decision is made to select a minimum basket of medical care services, the next step is to adjust for over- or underutilization observed in the base data set.

Selection of a Meaningful Risk Measure—The issue here is how to move from a range of possible outcomes that an individual could have in the next period to a singular measure of economic impact. Meier suggested two potential measures: (1) a measure that reflects a probability of expenditures exceeding an affordability threshold or (2) a measure that would be based on expected expenditures per family unit, in which expected expenditures are conditional on the risk characteristics of unit members.

Modeling Expenditures—Going hand in hand with the selection of a risk measure, the developers of an index will need to come up with the best approach for modeling expenditures. Two approaches might be considered. The first is the formation of mutually exclusive risk cells and then moving to fit loss distributions, and the second is a regression-based method.

Assessing Risk Protection (insurance)—In addition, developers will need to determine how to best assess the risk protection afforded by insurance. Meier suggested individual-level assessment followed by family-level aggregation. At a minimum, this assessment should include information on deductibles and an out-of-pocket maximum, but ideally it might also include coinsurance and copayments or some measure of actuarial value.

Measuring Family Resources—Family resources can be measured using an income definition consistent with the official poverty measure, or the SPM, plus consideration of assets. To account for assets, an annuitized value could be constructed whereby a family is projected to receive the value of an annual flow of income from its financial assets based on the life expectancy of adults in the family, using existing life tables. This annuitized



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