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

TYaditional
Rate-Setting Approach
Does Not Address
Negative Incentives
and Pressures
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In setting capitation rates, states make an effort to account for differences
in expected costs for broad categories of beneficiaries. To do this, they
frequently divide the eligible population into subgroups, or cells, of
individuals with similar characteristics Of the 17 states we contacted, 16
established rate cells according to <strong>Medicaid</strong> eligibility category, such as all
disabled people or all children in AF'c-eligible famnilies, with some
adjustment for age or the geographic area in which the beneficiaries
reside.m
Setting capitation rates in this way meets HCFA requirements and provides
appropriate payments to plans as long as each plan's enrollment mix of
beneficiaries with complex health care needs is comparable with the mix
of the population used to set the ratesr The money saved serving
enrollees with lower4han-average costs pays the cost of serving enrollees
with higher-than-average costs. However, plans may not enroll disabled
people with health care needs comparable with those included in setting
the rates. While some disabled enrollees may require little medical
treatment, others may have disabilities, such as quadriplegia, that require
extensive treatment The identifiability of such groups and the high costs
associated with their care heighten the incentives for health care plans to
avoid enrolling such individuals.
In most state programs, the rate-setting methods do not take into account
the cost variation associated with different types of disabling conditions.
Researchers have identified significant variation in medical costs within
different subcategories of conditions. For example, using 1992
fee-for-service claims data divided along clinical diagnoses, researchers
found average annual costs ranging from nothing (for the 5 percent of the
disabled population that had no medical claims during the year) to $35,000
per year in one state for an individual diagnosed with quadriplegia.
Similarly Oregon found tremendous variation in 1993 health care costs
among its 199 highest-cost children The 6-month group average was
$21,472, but amounts varied from a high of $410,420 to a low of $5,014. In
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