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

Executive Summary
1. Setting the Context
1. The Transformation to <strong>Managed</strong> <strong>Care</strong>
The transformation to managed care may be the most
important development since the rise of modern medicine
and the advent of insurance as the central means of paying
for health care. A relative rarity only twenty years ago, managed
care insurance now claims enrollment of over 150 million
Americans. This transformation not only changed the
relationships between patients and providers but also transformed
<strong>Medicaid</strong> from fee-for-service govemment health insurer
into a large-scale purchaser of pyvate insurance.
This study has two purposes. The first is to present an
overview of the structure and content of the detailed service
agreements which descnbe <strong>Medicaid</strong> managed care arrangements.
The second is to identily key issues presented by
<strong>Medicaid</strong>'s shift from a government insurer to one of the
nations largest purchasers of managed care. This study
should not be read as an analysis of the quality of <strong>Medicaid</strong>
managed care systems generally, nor should it be read as
an analysis of the entire legal framework in which <strong>Medicaid</strong>
managed care operates.
This analysis of 37 states <strong>Medicaid</strong> managed care contracts
should be viewed as a baseline. <strong>Medicaid</strong> agencies
face a major challenge in their efforts to buy managed care
for many reasons, not the least of which is the need to convince
managed care companies with limited expenence with
<strong>Medicaid</strong> populations to become active participants in their
states' programs. Significant changes can be expected over
time as <strong>Medicaid</strong> agencies gain greater purchasing experience
and as the <strong>Medicaid</strong> program itself is recast to reflect
this basic shiff from government insurer to insurance purchaser.
Indeed, the annotated tables which accompany
this report contain examples of states' reported modifications
and improvements made between 1995 and 1996 alone.
2. TheTransformation of <strong>Medicaid</strong> from Government
Insurer to <strong>Managed</strong> <strong>Care</strong> Purchaser
The evolution of <strong>Medicaid</strong> from government insurer to
managed care purchaser began slowly and then accelerated
rapidly. Over the past decade both Congress and the
Clinton Administration have steadily expanded the tools available
to state <strong>Medicaid</strong> agencies to mandate managed care
enrollment and purchase fully integrated service delivery
systems. These legal tools include Section 1915(b) and
Section 1115 of the Social Security Act. Section 1915 per
mits waivers of the <strong>Medicaid</strong> freedom-of-choice law provisions
in order to permit states to mandate enrollment in
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managed care. Section 1115 goes much further, permitting
states to obtain waivers of numerous aspects of federal <strong>Medicaid</strong>
law, including rules on eligibility, benefits, provider qualificaton
and payment rules, and administrative requirements.
Since 1993, the Clinton Administration has used this
authority to permit states to institute large-scale mandatory
managed care demonstration projects.
As a result, managed care enrollment among <strong>Medicaid</strong>
beneficiaries has grown dramatically in recent years. In 1983,
800,000 <strong>Medicaid</strong> beneficiaries were members of managed
care plans; by 1996, the number had surpassed 12 million
and is expected to grow steadily over the next several years.
Nearly all states mandate managed care enrollment for at
least some portion of their populations, but not all states
coniiact with ftu;-ris managed care organizatuons (i.e.. those
at nsk for both ambulatory and inpatient care costs).
Two key factors distinguish managed care arrangements
from other forms of insurance: 1) the nature of the contractual
promise between managed care companies and group
purchasers, and 2) the relationship between companies and
their providers. <strong>Managed</strong> care contracts involve both insurance
coverage and a promise of health care. <strong>Managed</strong> care
companies contract to furnish or arrange for insured services
through a specified network of health professionals,
institutions, and other providers. Under managed care, a
company's contractual promise to provide care devolves to
its providers, as a condition of participation, providers generally
must agree to accept patients who are referred to them
by the company at rates which the company pays for care.
Depending on the size of the premiums paid, managed
care plans can be either tightly or loosely structured health
care arrangements. Loosely-structured or "high option' plans
(typically point-of-service HMOs and preferred provider organizations)
permit members to seek some or most covered
services from non-network providers for a somewhat higher
fee. However, because high-option products are more expensive
to purchase and are designed for persons with discretionary
income to pay higher copayments, they are not used
by <strong>Medicaid</strong> agencies. Thus, the <strong>Medicaid</strong> managed care
system provided under a contract is effectively the only
source of covered services for enrollees, with the exception
of emergency care. No other purchaser faces quite the same
challenge of building a comprehensive, fully-integrated network
of services for its enrolled population.
Several aspects of <strong>Medicaid</strong> make purchasing managed
care especially complex: a) <strong>Medicaid</strong> enrollment is very short,
lasting less than one year on average; b) beneficiaries are
in poorer health than their non-low income counterparts and
may represent a greater cost to managed care organizafions;
c) <strong>Medicaid</strong> beneficiaries tend to live in communities
with a limited number of health providers, making it difficult
to build networks in these communities; d) <strong>Medicaid</strong> enroll-