Will managed care be Jekyll or Hyde for states?

Managed care has helped reduce Medicaid costs across the country, but the transition from fee-for-service has had its problems.

Medicaid managed care. Dr. Jekyll? Or Mr. Hyde? Health care costs have skyrocketed in the past decade. And state and federal spending for the program that helps finance health care for the poor - Medicaid - has doubled in the past five years. Medicaid spending increased from $41 billion to $72 billion from 1985 to 1990. Costs reached $138 billion by 1994 and accounted for 19 percent of states' total expenditures in 1995, according to the National Association of State Budget Officers.

Concerns over cost, quality and access to care have made managed care an attractive alternative to the traditional fee-for-service system. All but two states, Alaska and Wyoming, have adopted some type of Medicaid managed care system. State Medicaid programs have been enrolling beneficiaries in managed care plans since the early 1970s, especially in states or cities that had early entry to managed care. Washington state began contracting with Group Health of Puget Sound in 1970; New York City Medicaid beneficiaries were enrolled in the HMO-like Health Insurance Plan of Greater New York the same year. But in the past three years managed care has proliferated to the point where approximately one third of the nation's Medicaid recipients are enrolled. A total of 11.6 million people - more than 30 percent of the total Medicaid-eligible population - were enrolled in managed care as of June 1995, compared with 2.7 million in 1991.

Expansion of Medicaid managed care raises certain challenges for state policymakers: They must determine the "who and when," deciding who will be served by managed care and when the program will start. Specific regulations must be drafted for managed care organizations that help ensure the financial stability of the plan, establish standards for quality of care and protect patients' rights. Policy also must help preserve the so-called "safety net providers" such as inner-city clinics and community health centers that have traditionally served the poor.

MEDICAID MANAGED CARE PROGRAMS

With conventional (fee-for-service) Medicaid, health care providers bill a state from a fee schedule set by the state. If payments are low, private physicians may refuse to treat Medicaid patients. If that happens, the poor must use public health clinics and public hospitals for their medical care. Fee-for-service system critics also contend that it can lead to unnecessary care and hospitalization, which lead to unnecessary costs.

Medicaid managed care models differ state-to-state and within areas of the state but there are three common models:

* Primary care case management - Medicaid recipients enroll with a primary care physician paid through fees set by the state. This doctor manages the overall patient care and attempts to reduce unnecessary referrals or hospitalization. The physician serves as a "gatekeeper," an intermediary between the patient and the rest of the health care system. A primary care physician is usually paid a modest monthly fee for care management and referrals, but gets his regular fee-for-service payment for all other care.

* Full risk plan - The Medicaid beneficiary must receive care from a provider who belongs to a participating HMO. States contract with the HMOs for a set amount of services, paying a rate per patient (capitation). If the cost of care rises above the state payment, the managed care organization or its doctors must cover the difference.

* Limited risk plan - The state shares the risk with the managed care organization or the providers. States contract directly with providers on a per patient basis for certain services, but continue to pay fees for all other care.

In the budget shrinking '90s, the trend is enrollment in full risk plans that have the greatest potential to save money. The number of Medicaid patients enrolled in this model has increased more than 50 percent since 1993.

DR. JEKYLL EFFECT

States are moving to managed care as a way to save Medicaid money as well as a way to provide poor people with better access to good health care. In fact with the possible shift of Medicaid responsibility from the federal government to the states, there will be increased pressure to move away from costly fee-for-service and limit the state's risk through managed care.

Managed care can get the poor into needed medical care in addition to saving money. It can help coordinate services because patients are directed to appropriate health care providers, which is not generally the case in fee-for-service medicine. A managed care system can promote early intervention and preventive care and reduce reliance on emergency rooms, which many poor families use for routine health services. It also can increase the availability of a family doctor. State contracts with managed care systems can help control Medicaid costs and make spending more predictable.

Florida, a state with a good deal of Medicaid managed care experience, has seen some of these benefits. Representative Ben Graber, a physician and chairman of the House health committee in Florida, says that access to doctors improved since the state implemented MediPass, its primary care case management system.

"In 1983, no private physicians in Florida would take Medicaid patients. The payments were below cost. In the early '90s, we decided that we had to get Medicaid to private offices. We changed the reimbursement system by increasing the fees for primary care doctors and decreasing them for specialists, and we created MediPass. The private offices opened their doors. People were getting proper care, and the state saved 9 percent to 20 percent over the fee-for-service system," he explains.

Managed care is not the sole cure for the problem of access to physicians. Maintaining an adequate number of physicians willing to treat the poor will remain a challenge for states as long as payment inequities exist.

"It's just a matter of time before the Legislature and HMOs put a lot of pressure on the state to make it better financially for them," predicts Senator Milton Hamilton, chairman of the TennCare Oversight Committee. He notes that Tennessee has increased the managed care rate by $100 per patient per year.

One of the pluses of managed care is that states can hold health plans accountable for performance. Unlike fee-for-service where the state is dealing with hundreds of individual doctors, clinics and hospitals, managed care limits the state to contracting with a handful of health plans. In the contract with the state, the health plan must meet certain performance standards and submit reports on quality of care.

Recently, the Kaiser Commission on the Future of Medicaid reviewed reports and research available on Medicaid managed care and found that:

* There is a decline in the inappropriate use of emergency rooms, but there is little evidence to suggest that it reduces visits to primary care doctors. According to Tennessee's Hamilton, emergency room care for Medicaid beneficiaries decreased 25 percent since the inception of TennCare, the state's HMO-based program. "That saved a lot of money. If it wasn't an emergency the doctors referred them back to their primary care physician," he said.

* Many successful programs appear to save some money - between 5 percent and 15 percent over fee-for-service.

* The quality of care in fee-for-service and managed care is about equal.

This same report points out, however, that managed care enrollment currently focuses on the least expensive Medicaid populations - children and adults in poor families, and mothers and children. The bulk of Medicaid expenditures pay for care for the elderly and people with disabilities. The aged, blind and disabled comprise 27 percent of the nation's total Medicaid recipients, but require nearly 70 percent of the money.

"Two-thirds of our expenditures are on elders and people with disabilities. There is limited evidence to suggest that moving them to managed care would produce the same cost savings achievable with children and adults. There is no evidence to suggest that these individuals will get quality care," says Alan Weil, executive director of the Colorado Department of Health Care Policy and Financing.

Despite this lack of evidence, many states have adopted a "learn by doing" approach and are experimenting with enrolling people with disabilities and the elderly in managed care.

PACE - Program of All-Inclusive Care for the Elderly - is an example of this experimentation. Eight states have federal Health Care Financing Administration (HCFA) approval to conduct demonstration projects that merge care for more serious conditions and long-term care. Enrollment is limited to people 55 and older who have severe disabilities and meet the state's criteria for nursing home admission. Each site offers an array of services, including adult day care, nursing home care, in-home care, prescription drugs and therapy. Each site receives a fixed payment from pooled Medicaid and Medicare (federal health care program for the elderly) funds. These programs are relatively small, but have demonstrated success in limiting nursing home admissions and providing the state with predictable costs.

ON THE OTHER HAND, MEET MR. HYDE

One of the greatest fears about mixing Medicaid and managed care is that physicians and managed care organizations will limit services in order to make a profit from the amounts they are allocated by the state.

The federal government stepped into that debate in March with rules restricting HMO bonuses and other financial rewards to doctors as an inducement to limit the services provided under Medicaid and Medicare.

Under those federal HCFA rules, Medicaid and Medicare patients have the right to demand that HMOs provide information about financial incentives that might encourage doctors to limit services. Each violation can result in a $25,000 fine, and the government can block enrollment of new Medicaid and Medicare patients.

Quality is another hot item when Medicaid managed care is debated. Graber says that Florida enacted a law in 1992 that requires HMOs to be accredited through the National Committee for Quality Assurance. He also explains that those enrolled in health plans can switch every year, which "helps to keep up quality based on market competition." However, it was in this same state that one of the more flagrant abuses of Medicaid managed care occurred. In April 1995, Florida fined 12 HMOs a total of $520,000 for violating patient quality standards and other state requirements. Florida also restricted expansion and froze enrollment for some of the state's HMOs.

A team of 48 investigators auditing 29 Florida HMOs that provide Medicaid care found:

* A third failed to document medical screening and other necessary health care for children.

* Medical records of nearly 40 percent of the managed care organizations failed to document whether patients had received acceptable care; 28 percent failed to document hospital discharge planning.

* Half failed to evaluate new members within 90 days of enrollment as required by the state.

On balance, the auditors also found that 10 of the 29 managed care organizations were providing high quality medical care.

Graber said legislators passed a bill this year to fix the system.

"HMOs proliferated in the state when the Medicaid system went to managed care," he explains. "We ended up with 29 HMOs, and we lacked sufficient regulations. We have been trying to clean up the system but they've become strong enough that they managed to block reform legislation for the last two years."

Another challenge for states setting up new managed care programs is the literacy of the patients, who may find themselves bewildered participants. States found that some Medicaid beneficiaries had no experience with managed care and were unaware of the concepts of choosing a plan and then a primary care provider. Most states have tackled this problem with enrollment counseling and health plan marketing regulations. In the early days of Medicaid managed care, many people were taken advantage of by ruthless marketing strategies employed by health plans to increase the number of individuals enrolled.

Weil emphasizes that educating providers on changes to the system can be a very effective way of getting the word out to the beneficiaries. "There are a number of providers that make Medicaid an overwhelming part of their business - they can pass the word on to the clients and explain the new procedures as well as be informed on how the changes will affect their business," he states.

Choice of physician - or lack thereof - also has been a complaint of those enrolled in managed care. Many states allow the client to continue to see their family doctor or clinic but patients must be informed enough to make sure that their physician is enrolled in the health plan that they choose. If the patient does not choose a "gate-keeper" then the managed care organization will assign one. Senator Hamilton states that the biggest complaint has been - "I can't choose my own doctor."

"Blue Cross/Blue Shield, a participant in TennCare," he explains, "allowed some exceptions, under individual circumstances, that allowed patients to continue with their specialist physicians." Hamilton's bottom line is, "if we're paying for it, that freedom of choice is restricted."

Putting a Medicaid managed care system in place without careful and time-consuming planning also creates barriers. Rapid start-up of Colorado Access, which signed more than 17,000 new patients between December 1995 and February 1996, caused headaches for Medicaid beneficiaries, providers, and administrators.

Clients were allowed to choose the HMO that included their primary care physician, but the group they chose sometimes did not include the client's usual source of home care, medical equipment and other medical services. This affected people with disabilities, who had developed a system of providers to meet their complex medical needs.

"We did not do a good job in maintaining continuity of care for this population," states Weil. He explained that the state now allows people to drop out of managed care and return to the fee-for-service system. Of the 3,000 people with disabilities who were new to managed care, 300 have disenrolled.

Tennessee ran into similar problems when it put its 750,000 Medicaid recipients into TennCare program and extended health coverage through managed care plans to about 400,000 uninsured residents who did not qualify for Medicaid. Tennessee received HCFA approval for its program in November 1993 and started it in January 1994.

"We learned a major lesson," explains Senator Hamilton. "You have to have appropriate lead time, give people time to choose their managed care organization. The state needed a year's lead time to get our software up to speed and the public educated," he stated.

Hamilton also suggested that the state "took in too many people beyond the Medicaid eligible" initially - before they knew what to expect.

Other problems included enrollees ending up in plans with which their doctors were not affiliated. In rural areas, some of the plans lacked specialists and hospitals. Delayed payments to doctors and hospitals due to overloaded billing systems added to the discontent among health practitioners.

Ultimately, Tennessee can report a cut in the growth rate of the Medicaid budget to 5 percent or less a year as well as a reduction in unnecessary emergency room visits.

A 1995 Government Accounting Office (GAO) report, however, suggests: "So far, TennCare has met its initial objectives, but its long-range success is uncertain."

Representative Elizabeth Mitchell of Maine is well aware of what happens when a plan is put into effect too fast and too soon. Maine officials hope to enroll all Aid to Families with Dependent Children (AFDC) families in managed care by this July 1.

"Maine is going to benefit from being behind the curve. We have learned from these other states. We are going to make sure the access and providers are there - we are paying attention to that," she states.

Moving to managed care was spurred by "cost for the most part," Mitchell says. "A lot of people have had success keeping Medicaid costs down with managed care." Mitchell hopes that Maine's experience with managed care can be balanced between quality and cost.

WHERE DO WE GO FROM HERE

"Most states went into managed care with the primary motivation of saving money," Weil says. He feels that states rushed into it based on fairly limited experience and that Medicaid budgets may still be high because "managed care alone is not going to solve the problem."

Savings come from "how you deliver care" and not how you pay for the care, he says. For example, Colorado has an aggressive home- and community-based service program in an attempt to reduce nursing home costs - which can average $35,000 a year. "HMOs are not going to magically have the answer to the health care delivery problems that states face just because you write them a check," he adds.

States need to develop more efficient methods of delivering health care to meet the goal of saving money and providing quality care. Managed care is and will continue to be an integral part of this process, but it is just one step toward the solution.

RELATED ARTICLE: GETTING THE FEDERAL NOD FOR MANAGED CARE

Medicaid managed care programs vary state by state in geographic scope, payment methods, enrollment requirements and determination of who is eligible. States can operate Medicaid managed care programs without permission from the federal government if:

* Enrollment is voluntary.

* The same program operates state-wide.

* HMOs participating have non-Medicaid membership of 25 percent.

* Comparable benefits are provided to all Medicaid patients in the state.

States must get permission from the federal Health Care Financing Administration through waivers to the Social Security Act to use federal money on any Medicaid program not meeting these requirements.

RELATED ARTICLE: ARIZONA ONE OF FIRST TO EMBARK ON MANAGED CARE

Arizona has always had a type of managed care program for its poor and didn't even participate in the federal Medicaid program until the early 1980s. Since 1864, health care for the state's poor was provided by counties through county hospitals and clinics or contract providers.

Facing a fiscal crisis in 1980-81, the state applied for federal permission (and funding) for its program - Arizona Health Care Cost Containment System (AHCCCS) - as a Medicaid demonstration project. With approval came federal money to match the state's contribution.

"The beginning was an absolute disaster," explains Representative Herschella Horton. "I think we tried to bring up too much, too fast. As we always do, we got shipwrecked.

"But now," she adds, "the program is touted as a model for the nation. We can provide indigent health care for a third of the cost [of fee-for-service Medicaid]. We're successfully holding down costs, and there's more money for [expanding] care."

Qualified organizations such as health maintenance organizations (HMOs) and individual practice associations (groups of physicians) submit bids to the state on providing medical care. The state specifies the types of services, groups eligible and conditions under which an organization must operate. The bids include capitation rates (payment per patient) that the organization is willing to accept. The state evaluates the bids and negotiates payment amounts.

"At first, we had to beg people to bid," Horton says. "The last time, there were 90 organizations that submitted bids."

The increased competition is designed to keep profits in line. "One year, AHCCCS plans kept $40 million," the representative points out. "That was their profit. One of the largest HMOs had $25 million. We said, 'Whoa, with that much in profits, who's getting care?'"

Word of the $52 million in profits in 1993 also encouraged more groups to bid - the number doubled. That competition forced bidders to decrease rates. The Legislature also imposed a profit cap.

That the program is holding down Medicaid costs is evident. Capitation rates dropped by 11 percent in 1995. The Arizona system cost 8 percent less than the average traditional Medicaid program in 1990, 18.9 percent less in 1991, 11 percent less in 1992 and 11.3 percent less in 1993, according to a report by Laguna Research Associates. Total savings including program and administrative costs averaged 7 percent per year over the first 11 years of the program.

Horton feels the only problems with the Arizona system are that more oversight is needed to determine that the health plan groups are "actually providing what they say they will provide" and that there be more emphasis on preventive care.

"All the health plans are supposed to do family planning and childhood inoculations. But we fell woefully short on the number of children immunized. I just don't think they do enough for active outreach into the community," she explains.

All in all, though, she summarizes, "I think our program works fairly well. If you want to do cost containment and still provide good care - it's a delicate balancing act."

Laura Tobler is a research analyst specializing in managed care issues at NCSL. Dianna Gordon is an assistant editor of State Legislatures.