Medicaid Managed Care - U.S. Senate Special Committee on Aging

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formed by the county government. This option was designed in part to protect county-based safety net
providers. The other, called a mainstream plan, is a private plan selected through a bidding process.
Apart from the mechanics of the bidding process, this approach has been criticized by the managedcare
industry for unnecessarily limiting competition and beneficiary choice. 26 In some counties,
lawsuits have been filed challenging the selection process. Implementation was also delayed until the
1915(b) waiver was approved and because of start-up problems with the local initiative plans.
Although mainstream plans were chosen in most counties in 1995, the two-plan model is not yet
operational in any county (GAO 1995b; Sparer et al. 1996b).
New York State adopted competitive bidding in 1995. New York City recently awarded contracts to 20
plans, 6 of which were new to the program. Plans that met the state's initial technical and financial
criteria were reviewed by city officials before being offered contracts. Although some plans were not
approved, the plans whose contracts were renewed accounted for 97 percent of previous enrollment
(United Hospital Fund 1996b).
Capitation Payments and Risk Adjustment
According to the NASHP survey, 30 of 38 states with risk-based programs used a rate-setting
approach to establish capitation payments (Horvath and Kaye 1997). Many of these are similar to that
used in the Medicare program. States tell plans how much they will pay to provide services to plan
enrollees. By law, capitation payments to managed-care organizations must be computed on an
actuarially sound basis and cannot exceed what would be paid for an equivalent group under fee-forservice
<strong>Medicaid</strong>. The latter requirement has been waived in some demonstration states.
States typically pay a percentage (generally 85 percent to 95 percent) of the cost of serving enrollees
under fee-for-service <strong>Medicaid</strong>.2" This approach is designed to guarantee a level of savings to the
states. As in Medicare, savings may not be realized if risk differences between plan enrollees and other
beneficiaries are not accounted for through a risk-adjustment mechanism. In states with mandatory
enrollment (at least for certain categories of beneficiaries), risk adjustment is not a problem for
guaranteeing savings to the state, although it may be an issue in ensuring fair payment among
participating plans. 23
One issue is whether the methods used provide compensation that is adequate to support access for
beneficiaries and to encourage competition among plans. The Kaiser/Commonwealth study found that
three of five states set uniform rates for all plans in a given area, while the other two negotiated
26In some cases, the local initiative plan can contract with a number of private health plans, resulting in more choice for
beneficiaries than appears on the surface.
' Even more than in Medicare, this calculation is increasingly problematic. As the proportion of beneficiaries in
managed care grows, the cost experience of fee-for-service beneficiaries becomes a less stable and less typical basis for
calculating capitation rates.
" See Chapter 5 of this report for a discussion-mostly in the Medicare contexts-o the importance of risk adjustment
for promoting access to care for vulnerable populations.
1997 Annual Report to Congress/Chapter 20 444