Managed Care and Medicaid - Europe PMC

A Conflict of Strategies: Medicaid Managed Care and Medicaid Maximization Teresa A. Coughlin, Stephen Zuckerman, Susan Wallin, andJohn Holahan Objective. To examine the influence of state strategies aimed at increasing federal Medicaid matching dollars on the design of states' Medicaid managed care programs. Study Design. Data obtained from the 1996-1997 case studies of 13 states to examine how states have adapted the design of their Medicaid managed care programs in part because of maximization strategies, to accommodate the many roles and responsibilities that Medicaid has assumed over the years. Principal Findings. Our study showed that as states made the shift to managed care, some found that the responsibilities undertaken in part through maximization strategies proved to be in conffict with their Medicaid managed care initiatives. Among other things, the study revealed that most states included provisions that preserved the health care safety net, such as adapting the managed care benefit package and promoting the participation of safety net providers in managed care programs. In addition, most of the study states continued to pay special subsidies to safety net providers, including hospitals and clinics. Conclusions. States have made real progress in moving a large number of Medicaid beneficiaries into managed care. At the same time, many states have specially crafted their managed care programs to accommodate safety net providers and existing funding mechanisms. By making these adaptations states, in the long run, may compromise the central goals of managed care: controlling costs and improving Medicaid beneficiaries' access to and quality of care. Key Words. Medicaid managed care, Medicaid maximization strategies, safety net providers, access to care

Over the past decade many states have broadened the scope of their Medicaid programs. Medicaid is no longer viewed as simply paying for health care for a defined low-income population. Instead, its roles now include protecting safety net providers, substantially subsidizing the costs of providing care to

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the uninsured, financing services provided by public health departments, and funding a range of mental health services. As a result Medicaid has become an increasingly more complicated program. In addition, since many of these new responsibilities had previously been funded with state dollars, Medicaid has also provided states with a steady revenue stream in the form of federal matching dollars. The process of shifting state-funded programs into Medicaid and receiving a federal matching payment is commonly referred to as "Medicaid maximization." States have also shifted the financing of their share of Medicaid from state general funds to nontraditional revenue sources such as provider taxes and intergovernmental transfers. Nontraditional revenues have been used extensively in the Medicaid disproportionate share hospital (DSH) program as well as in other parts of Medicaid (U.S. General Accounting Office [GAO] 1994, 1998; Ku and Coughlin 1995). States pursued maximization techniques, all of which are entirely permissible within Medicaid rules, for a variety of reasons. A key one was simply to secure more federal dollars to support programs and services that had previously been paid with state dollars only. Without maximization, states would have had to appropriate additional state funds or make program cuts. Another reason states maximized Medicaid was to help support the health care safety net and to supplement the costs of caring for the uninsured. Thus maximization strategies provided states with tremendous financial advantages. Although maximization strategies have benefited state treasuries, they have caused Medicaid to become yet more complex and to assume multiple roles and responsibilities. With maximization, the scope of Medicaid has broadened considerably so that it now funds programs and services well beyond traditional health care services. Recently states have become interested in Medicaid managed care (MMC) as a way to reduce program costs as well as to improve access Funding for this research was provided by the Urban Institute's Assessing the New Federalism project, which is supported by the Annie E. Casey, HenryJ. Kaiser Family, W K. Kellogg,John D. and Catherine T. MacArthur, McKnight, Robert WoodJohnson, Charles Stewart Mott, and Weingart Foundations, and the Commonwealth Fund and the Fund for NewJersey. Additional support is provided by the Joyce Foundation and the Lynde and Harry Bradley Foundation through grants to the University of Wisconsin-Madison. Opinions expressed are those of the authors and do not necessarily reflect the positions of the Urban Institute or its funders. Address correspondence to Teresa A. Coughlin, M.P.H., Senior Research Associate, The Urban Institute, 2100 M Street, N.W, Washington, DC 20031. Stephen Zuckerman, Ph.D. is Principal Research Associate; Susan Wallin, M.H.S.A. is a Research Associate; andJohn Holahan, Ph.D. is Director, Health Policy Center, The Urban Institute. This article, submitted to Health Services Research on August 3, 1998, was reviewed and accepted for publication on October 27, 1998.

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and quality of care for Medicaid beneficiaries. However, as states make the shift to managed care, some have found that the increased responsibilities of Medicaid, in part undertaken through maximization, have in some cases come into conflict with states' MMC initiatives. Under MMC states want to drive hard bargains with health plans while providing beneficiaries with access to a range of plans. At the same time, states' dependence on the Medicaid program to fund a wide array of services, protect safety net providers, and finance care for the uninsured has limited their ability to aggressively ratchet down program costs. Using information obtained from 13 state case studies, we examined ways in which states have adapted the design of their MMC programs to accommodate the many roles Medicaid has taken on over the past decade. Implementing MMC has perhaps been the single largest innovation in the Medicaid program during the 1990s. Today 49 states use some form of managed care in their Medicaid program. Reflecting the states' rapid implementation of MMC, the share of the Medicaid population enrolled in managed care has increased from less than 10 percent in 1991 to almost 50 percent in 1997.

ASSESSING THE NEW FEDERALISM PROJECT To conduct our examination we relied on information collected from case studies done as part of the Urban Institute's Assessing the New Federalism (ANF) project (Kondratas, Weil, and Goldstein 1998). In brief, ANF is a large ongoing project that among other things looks at health care policies and programs for the low-income population in 13 states: Alabama, California, Colorado, Florida, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, New York, Texas, Washington, and Wisconsin. The case studies, which consisted of interviews with state officials, providers, and others, were conducted in late 1996 and early 1997. Medicaid managed care was one of a range of issues examined in the case studies. All 13 ANF states had some type of MMC program, although the scope of the programs varied greatly, ranging from limited programs in Alabama and Mississippi to a large, comprehensive program in Washington. We also examined the state financing of Medicaid and other health care programs for the poor. By looking at these issues we were able to identify areas where states had engaged in Medicaid revenue maximization.

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MEDICAID MAXIMIZATION Public Health In recent years, Medicaid has become an important source of revenue for many public health departments, particularly for maternal and child health (MCH) services and home health care. Among ANF states, both state and local health departments have actively pursued Medicaid maximization. Efforts include designation of public health departments as Medicaid-certified providers (California) and requirements that counties bill Medicaid for certain services (Minnesota, New York, and Washington). In addition, optional expansions of Medicaid eligibility for women and children have in some cases been a deliberate attempt by the state to draw down the federal Medicaid match to support MCH services. Many ANF states have achieved notable success in increasing Medicaid reimbursements to public health departments. In Alabama, third-party reimbursements (primarily Medicaid and Medicare) increased as a percentage of the state's public health budget from 40 percent in 1992 to 48 percent in 1997. Medicaid revenues have contributed a significant and growing share of local health department budgets in Florida. Between 1992 and 1996, for example, Medicaid's share of funding for Florida's children's services rose from 14 percent to 21 percent. Minnesota has been particularly active in maximizing Medicaid funding for its public health departments. Between 1987 and 1994, for example, the share ofMinnesota's local health department budgets derived from Medicaid increased from 9 percent to 19 percent. With the infusion of Medicaid funds, local health departments have been able to hire new staff, and our case studies suggest that Medicaid revenues have also subsidized health department services for the uninsured and populationoriented public health functions.

Mental Health Another area in which states have pursued Medicaid maximization is mental health. States have increasingly moved persons out of state psychiatric hospitals, where they are generally ineligible for Medicaid, into the community where a range of mental health services are reimbursable by Medicaid. States have also added optional services (e.g., rehabilitation and clinic) to their list of covered Medicaid benefits, enabling them to bill Medicaid for mental health services that fall into these categories. Several states have used the Medicaid DSH program (discussed further on) to increase payments to state


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psychiatric hospitals (GAO 1998). For many states, the DSH program became a significant source of revenues for their mental health systems. As a result of Medicaid maximization strategies coupled with the fact that many who receive services from the public mental health system are Medicaid-eligible, Medicaid comprises a significant fraction of the public mental health budget in most states, including ANF states (National Association of Mental Health Programs 1995). In Colorado, for example, public mental health agencies received 43 percent of their funding from Medicaid in 1996. This share has increased over time and continues to increase. In Wisconsin, Medicaid also accounted for about 43 percent of public spending on mental health. In New York, a reported 60 percent of the state's vast mental health system (public and private) was funded through Medicaid and the Medicaid DSH program in 1997, up from 55 percent in 1993. This growth in Medicaid funding of New York's mental health services dates back to at least 1987 (Fossett 1993). As yet another example, Washington's legislature directed the state Division of Mental Health to maximize federal funding of mental health in 1985. Since then, the state has obtained federal matching funds for the bulk of its services. From 1990 to 1995, Medicaid spending on mental health grew at an average annual rate of nearly 32 percent in Washington compared with 7 percent per year in the nation as a whole.' The Medicaid DSH Program Perhaps the largest revenue-maximizing strategy that states have used in recent years is the Medicaid DSH program. DSH was designed to provide financial help to safety net hospitals that serve a high volume of low-income patients. DSH expenditures increased sharply in the 1990s, growing from about $1 billion in 1990 to nearly $18 billion in 1992. While expenditure growth has leveled off since that time, DSH payments still account for about $1 out of every $10 spent in the Medicaid program today. The DSH program has been a highly controversial issue. Much of the debate stems from the fact that several states have aggressively used the DSH program to fund general state services. That is, rather than giving hospitals the full federal Medicaid match they received on DSH payments, some states kept a share of the federal match to be used for other state purposes, often completely outside of health. Indeed, a 1993 survey of 39 state DSH programs indicated that states were retaining at least one-third of federal DSH matching dollars (Ku and Coughlin 1995). States have typically used intergovernmental transfers (IGTs) or provider taxes as the state share for their DSH programs. Under IGTs, states

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transfer funds from public institutions such as state psychiatric facilities, university hospitals, or county hospitals to the state Medicaid agency. Alternatively, under provider tax programs, states collect revenues from public and private hospitals. Using the IGT or tax revenue, the states then make DSH payments to hospitals and collect Medicaid matching dollars in the process. Thus the states make the required DSH payment but without using any actual state funds. Several of the ANF states, including Alabama, California, Michigan, New Jersey, New York, and Texas, developed very large DSH programs to maximize federal Medicaid dollars. In New Jersey, for example, DSH expenditures went from $36 million in 1990 to $1.1 billion in 1992. Likewise, Texas DSH spending went from $5 million to $1.5 billion over the same time period. Many of the states (including Alabama, Colorado, Michigan, and New York) that established extensive DSH programs did not fully pay out federal DSH dollars to hospitals as intended by the program but, instead, kept a share of the funds for other purposes. The case studies also showed that most of the study states committed limited, if any, state dollars to the financing of their DSH program. Most relied primarily on IGTs for state financing, but some (Massachusetts and New York) relied on provider taxes, and only a few relied on state general revenue (e.g., Minnesota). Finally, several ANF states had used the DSH program to help support their mental health systems, as mentioned above, by making DSH payments to state psychiatric hospitals. Florida, Michigan, NewJersey, and Washington all began to make large DSH payments to such hospitals in the earlier part of the 1990s.

ADAPTING THE DESIGN OF MEDICAID MANAGED CARE PROGRAMS The case studies revealed that several ANF states had adapted their managed care programs to accommodate some of the many roles Medicaid had assumed over the years. The bulk of the adaptations were aimed at protecting safety net providers and preserving the complex web of funding streams developed through Medicaid revenue maximization efforts. While we found that states made numerous adaptations, in some cases the adaptations did not cover all of the services that states had brought onto Medicaid to maximize federal funding under fee-for-service. Hence, there was concern that some services would be cut or that financing would become a local responsibility.


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Adapting the MMC Service Package One area in which we observed states making accommodations was in the design of their MMC benefit package, that is, what services to include or exclude ("carve out"). Mental health services were often at the center of the carve-out debate. Among ANF states, several chose to carve out mental health services from the physical health managed care plan, and they continue either to pay for these services on a fee-for-service basis or to create a separate capitated mental health program. California, New York, Colorado, Michigan and Massachusetts opted to carve out mental health. The carve-outs were done in part because health plans at present have limited experience in taking care of persons with mental illness and states wanted to assure appropriate care and reduce plans' possible risks associated with this population. But in some instances mental health services were also carved out to protect state and local government agencies that had historically provided mental health services to Medicaid clients and other low-income populations. California and New York, for example, are giving preference to county or quasi-public boards to serve as the mental managed care organization. The desire of states to protect publicly funded mental health services under MMC has been reported elsewhere (Bachman and Burwell 1997). Promoting Participation ofSafety Net Providers Most ANF states have included special measures in their MMC initiatives that are aimed either at encouraging commercial health plans to include safety net providers in their networks or facilitating the creation of managed care plans centered on safety net providers. States have instituted these measures because of concerns that health plans may avoid contracting with safety net providers as these providers tend to be more costly than other providers. Our study and others indicate that the various strategies that states have followed are resulting in the widespread participation of safety net providers (e.g., federally qualified health centers or FQHCs, local health departments, and mental health clinics) within the MMC framework (Solloway and Darnell 1998). States have used a range of approaches to promote the inclusion of safety net providers by commercial plans. Some require that plans contract with designated safety net providers. In Minnesota, for example, all plans must include FQHCs, rural health centers, and local health departments in their provider networks. Other states award bonus points to bids of managed care plans when they contract with safety net providers. California, Michigan, Florida, New York, and Washington were among the states that have

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employed this strategy. In Michigan, for example, health care plans were given extra points in the bidding process if they contracted with school-based clinics, local health departments, or other safety net providers. Taking support one step further, some states have encouraged safety net providers to create their own managed care plans. Again, states have done this in various ways. Massachusetts and NewJersey, for example, sought Medicaid waivers from the so-called "75/25" enrollment rule, which required that Medicaid and Medicare beneficiaries could account for no more than 75 percent of a health plan's enrollment.2 By obtaining these waivers, health plans that served largely public populations could participate more fully in the states' MMC program. In an effort to promote the development of safety net plans, New York state gave grant monies to safety net providers to help them start their own plans. Likewise, Massachusetts gave money to help create the Neighborhood Health Plan, which serves about 35 percent of the state's Medicaid HMO population. Of the ANF states, California and Minnesota have perhaps gone the furthest to preserve the health care safety net. In California, 12 counties, including Los Angeles County, are implementing the Two-Plan managed care initiative. Under the program, one plan, called the "local initiative," is a county-sponsored plan that must include hospitals receiving DSH payments, FQHCs, and other traditional providers. The other plan is a private health care plan, often referred to as the "mainstream" plan. Among other things, the local initiative is paid a higher capitation rate to reflect the requirement that the plan contract with safety net providers. In 1997, the Minnesota state legislature granted counties the option to develop individual county-based purchasing models rather than implementing the state's long-running MMC program: the Prepaid Medical Assistance Program (PMAP). While a number of factors contributed to the state's establishment of the county option, the key one was that Minnesota county governments became highly concerned that PMAP would have a serious negative effect on their financial situation. As mentioned earlier, through a state-initiated Medicaid maximization policy, Minnesota's local health departments had grown increasingly reliant on Medicaid dollars to fund their operations over the past decade. County governments feared that under managed care these funds would be greatly reduced and that they would have to cut services or pay for them with county funds. As of this writing, 47 Minnesota counties (out of 87 statewide) have submitted an application to develop a county-based model.


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Preferential Plan Assignment ofEnrolkes Another way in which states adapted their MMC programs to support the safety net was through enrollee auto assignment. That is, some states crafted their automatic assignment process so that safety net-based plans received preferential assignment of Medicaid beneficiaries who failed to choose a plan. This was done to help boost the safety net plans' market share. It was also done because auto assignees are generally considered a lower-risk population compared to their counterparts. Thus, by assigning more auto enrollees to the safety net plans, states hoped that these plans would have an adequate enrollment base that might also be lower risk-and lower cost-relative to other plans. New York, for example, was concerned that Prepaid Health Services Plans (PHSPs), which are plans established by community health centers and public hospitals, might be harmed under its statewide MMC effort and chose to give auto assignment preference to the PHSPs. The first 25 percent of auto assignees are enrolled in PHSPs, and the remaining 75 percent are distributed evenly across all plans. Under its Two-Plan initiative, California gives assignment preference to the local initiative plan. The primary objective is to assume sufficient Medicaid enrollment so that safety net hospitals continue to get the same level of DSH payments that they received under fee-for-service Medicaid. Medicaid DSH Payments and Other Provider Suppkmental Payments Beyond promoting safety net providers' participation and role in MMC efforts, some states targeted such providers for special payment subsidies. These supplemental payments took a variety of forms and served a range of purposes. Nearly all ANF states (Minnesota was the notable exception) chose to keep Medicaid DSH payments out of the plan capitation rate and instead continue to pay them directly to safety net hospitals.3 It was feared that safety net providers might experience a decline in Medicaid reimbursement as beneficiaries moved to mainstream providers under MMC. By making DSH payments separately, states could thus maintain their level of Medicaid funding for safety net hospitals. In some instances, states were also concerned about the financing of the DSH program. As mentioned earlier, several states (e.g., California and Texas) relied on IGTs from public hospitals for the state share of DSH payments. If DSH payments to these hospitals declined significantly under MMC, the providers might be unwilling to put up the IGT, thereby jeopardizing the funding of the DSH program.

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Besides paying DSH directly to hospitals, three states (California, New York, and Massachusetts) obtained DSH-like funds to help support safety net hospitals. In 1995, the federal government granted the Los Angeles County Department of Health Services a Medicaid Section 1115 waiver that allocated federal money to the county health care system to assist in restructuring the provision of indigent care and, in general, to help county facilities become more competitive. Los Angeles County projects were to receive about $900 million in federal funds over the five-year waiver period. Likewise, New York, as part of its Section 1115 waiver program, was granted additional federal funds to help safety net hospitals make the transition to mandatory MMC. Under the waiver about $1.5 billion in federal funds will be made available to New York safety net hospitals. Some ANF states also provided special subsidies to community health clinics. For example, several of the states (e.g., Minnesota, Wisconsin, and New York) have continued to pay FQHCs on a cost basis despite having federal waivers exempting them from doing this.4 Wisconsin, for example, in an effort to encourage health plans to contract with FQHCs and to ease the clinics' transition to MMC, pays FQHCs the difference between their reasonable costs and the rates that managed care plans pay them. Using a slightly different approach, Colorado increases capitation rates for health plans that have FQHCs in their network to account for paying the clinics cost-based reimbursement.

DISCUSSION AND CONCLUSIONS States have achieved substantial success in shifting their Medicaid population into managed care. Within just the last five years the share of Medicaid enrollment in managed care has increased nearly fivefold. States are moving to managed care for Medicaid with the goals of improving beneficiaries' access and controlling the growth in program costs. However, in our study of the 13 ANF states we found that these goals are often at odds with the many roles and responsibilities that Medicaid has taken on over the past decade. This conflict has led most ANF states' managed care initiatives to include some provisions to accommodate many of the new obligations Medicaid has assumed (e.g., subsidizing safety net providers and public health agencies and assuring adequate funding for services in mental health, maternal and child health, and for developmentally disabled persons). The bulk of the MMC adaptations were aimed at preserving the health care safety net in terms of both services delivery and financing. ANF states


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have used a range of program adaptations, including awarding extra contract points to health care plans that include safety net providers, giving preferential auto assignment to safety net-based plans, and creating an MMC model in which one of the two allowable plans must be a safety net-based plan. In addition, most of the ANF states made DSH payments directly to hospitals rather than folding them into the capitation rates. Many of the states also continued making special payments to FQHCs. Interestingly, many ofthe adaptations that states had put in place to help the safety net were included in the Balanced Budget Act of 1997. Among other things, the Act eliminated the 75/25 enrollment rule; that is, states no longer have to seek a special federal waiver to mandate Medicaid beneficiaries to enroll in health care plans whose business is largely or exclusively Medicaid and Medicare. The BBA also encourages, without requiring, states to maintain "relationships with providers that have traditionally served Medicaid beneficiaries" in the process of auto assigning beneficiaries. Further, the Act mandates that states not fold DSH payments into capitation rates and, instead, that they make the payments directly to hospitals. While ANF states made many accommodations, there were instances in some states where services that had been shifted onto Medicaid were not funded under MMC. The fate of these services is an important matter: are they cut or will localities pay for them? Of the ANF states, Minnesota counties were most concerned about this issue. Although it is too soon to make a full assessment, the policies that states (and more recently the federal government) have adopted to protect the health care safety net potentially have both positive and negative outcomes. With respect to the positive, the protections have helped maintain the financial viability of safety net providers and, in turn, have continued Medicaid's support of caring for persons without health insurance. This help has come at a good time given that safety net providers are already feeling fiscal stress from changes in the overall health care market. Regarding the negative, because of the many adaptations and accommodations made, states may not fully realize the costs savings they hoped for and budgeted. Further, by protecting safety net providers as well as promoting the development of safety net-based plans, states in the long run may be compromising Medicaid beneficiaries' access to mainstream health care providers and plans, which was one of the principal goals of the MMC. In fact, recent trends show that the percentage of Medicaid-dominated plans serving the Medicaid market rose substantially between 1993 and 1996 (Felt-Lisk and Yang 1997). These newer plans may thrive because they are

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given preferential treatment and not because they are the most competent, innovative, and financially stable Medicaid managed care plans. If that is the case, then the quality of the plans available to Medicaid beneficiaries could be compromised. These potential problems, combined with the fact that commercial plans have pulled out of MMC in several states (Meyer 1997), suggests that, in the long run, MMC may prove to be less of a revolution that it once was heralded to be.

NOTES 1. Urban Institute calculations are based on data from the HCFA-64 reports. 2. The 75/25 rule was repealed in the 1997 Balanced Budget Act. Now plans can enroll Medicaid clients in managed care plans that serve exclusively public populations without seeking a special federal waiver. 3. When we conducted the site visits in late 1996 and early 1997, states could choose whether they wanted to make DSH payments directly to the hospitals or fold them into the capitation rate. However, the 1997 Balanced Budget Act, which was passed after our visits, now prohibits states from folding DSH into the capitation rates, unless they were doing so as ofJuly 1, 1997. 4. Technically, New York had not paid its FQHCs on a cost basis before its 1115 Partnership Plan waiver was implemented. Under the waiver, however, the state is making transition payments to FQHCs and paying the difference between what health plans pay FQHCs and what FQHCs had been paid before the waiver took effect.

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Affairs 12 (3): 81-94. Kondratas, A., A. Weil, and N. Goldstein. 1998. "Assessing the New Federalism: An Introduction." Health Affairs 17 (3): 17-24. Ku, L., and T. A. Coughlin. 1995. "Medicaid Disproportionate Share and Other Special Financing Programs." Health Care Financing Review 16 (3): 27-54. Meyer, H. 1997. "Medicaid States Serve Up a Real Turkey." Hospitals and Health Networks, 20 November. National Association of Mental Health Programs Directors Research Institute, Inc. 1995. "Study Results, FY 1993: Funding Sources and Expenditures of State Mental Health Agencies." December.


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Solloway, M., and J. Darnell. 1998. "The Impact of Medicaid Managed Care on Essential Community Providers." Portland, ME: National Academy for State Health Policy. U.S. General Accounting Office (GAO). 1998. "Medicaid Disproportionate Share Payments to State Psychiatric Hospitals." Washington, DC: GAO/HEHS-9852.January. . 1994. "Medicaid: States Use Illusory Approaches to Shift Programs to Federal Government." Washington, DC: GAO/HEHS-94-133, August.