Scientists & Engineers for America

Medicaid Managed Care: An Overview and Key Issues for Congress

Introduction

In existence since 1965, Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services, as well as long-term care, to nearly 60 million people at an estimated cost to the federal and state governments of roughly $333 billion in FY2006, making it as large as Medicare, the federal health care program for the elderly and certain individuals with disabilities. Among major domestic entitlement programs, only Social Security costs more.

Each state designs and administers its own Medicaid program under broad federal guidelines. For states, it is the second largest spending item after education. Medicaid is expected to represent 2.5% of GDP in FY2006. The expenditure growth is even more striking. Program spending increased by more than 49% between 2000 and 2005, exceeding growth in general and medical inflation, and the rates of growth in spending for both Medicare and Social Security over the same period. Medicaid spending has grown partly because medical care keeps getting more expensive, and because over time, federal law has been expanded significantly to cover more people and more benefits. Certain state financing mechanisms have also played a role in increased spending under Medicaid.

As Medicaid entered the 1980s and 1990s, more attention — and blame — for steadily rising Medicaid costs was attributed to the economic incentive to provide more care under the fee-for-service (FFS) delivery system, in which payments are made for each unit of service delivered. Under this system, Medicaid budgets were somewhat unpredictable, and outlays were significantly affected by the quantity and types of care provided. It was also unclear whether state Medicaid programs were getting good value for their ever increasing Medicaid dollars. Following the lead in the private sector among large employers, many states began to turn to managed care for their Medicaid programs. The goal, then and today, is both to rein in Medicaid costs by making payments on a predetermined, per-person-per-month basis, rather than for each unit of service delivered, and to provide a better, coordinated system of care for beneficiaries, with an emphasis on preventive and primary care services.

But Medicaid managed care has not fully achieved either goal yet. Data from FY2003 (most recent available) indicate that while about two-thirds of Medicaid beneficiaries nationwide participate in some form of managed care, the majority of expenditures still occur in the FFS setting, mainly because expensive long-term care services are rarely offered through managed care. In addition, while there are some data suggesting improvements in the quality of care delivered in Medicaid managed care, commercial (employer-based) and Medicare managed care plans continue to do better on some measures of effectiveness.

Medicaid Eligibility and Covered Benefits

Before getting into the specifics of how care is delivered under Medicaid, it is important to understand who is eligible for the program and the range of benefits that may be covered.

Eligibility

The Medicaid statute (Title XIX of the Social Security Act) defines more than 50 distinct population groups as being potentially eligible. Some eligibility groups are mandatory, meaning that all states must cover them; others are optional. To qualify for Medicaid coverage, applicants’ income (e.g., wages, Social Security benefits) and often their resources or assets (e.g., value of a car, savings accounts) must meet program financial requirements. These requirements vary considerably among states, and different rules apply to different population groups within a state.

Medicaid eligibility is also subject to categorical restrictions — generally, it is available only to specific categories of people, including the elderly, persons with significant disabilities, members of families with dependent children, and certain other pregnant women and children. Other individuals (e.g., childless adults with no disability) are not eligible for Medicaid no matter how poor they are, unless they are covered under a special waiver. In recent years, Medicaid has been extended to additional groups with specific characteristics, including certain women with breast or cervical cancer and uninsured individuals with tuberculosis.

Standard Benefits

Medicaid benefits are identified in the federal statute and regulations as either mandatory or optional, and include a wide range of medical care, items and services. Examples of benefits that are mandatory for most Medicaid groups include (1) inpatient hospital services (excluding services for mental disease), (2) laboratory and x-ray services, (3) physician services, and (4) nursing facility services for persons age 21 and over. In addition to prescribed drugs that are offered by all states, other optional benefits covered by many states include for example: (1) routine dental care, (2) physician-directed clinic services (frequently for mental health care), (3) therapies (e.g., physical, occupational and speech), and (4) transportation (in order to receive medical care). In general, most Medicaid beneficiaries, whether covered via a mandatory or an optional eligibility group, are entitled to all the standard mandatory and optional benefits offered by a state Medicaid program.

New Benefit Option

Under the recently enacted Deficit Reduction Act of 2005 (DRA; P.L. 109- 171), as of March, 31, 2006, states may offer new packages of benefits to certain groups of Medicaid beneficiaries. This new benefit option includes benchmark and benchmark-equivalent coverage that is nearly identical to the plans offered through the State Children’s Health Insurance Program (SCHIP), with some additions. Nearly all states operate their SCHIP programs under managed care arrangements.

Under DRA, benchmark coverage includes the care and services available through: (1) the standard Blue Cross/Blue Shield preferred provider plan under the Federal Employees Health Benefits Plan (FEHBP), (2) health coverage for state employees, (3) health coverage offered by the largest commercial HMO in the state, and (4) Secretary-approved coverage, which may include any other package of benefits that the Secretary of Health and Human Services (HHS) determines will provide appropriate coverage for the targeted population. Benchmark-equivalent coverage must include certain services, and must have the same actuarial value as one of the benchmark plans, with at least 75% of the actuarial value for selected services.

A number of groups are explicitly exempted from mandatory enrollment in this new benefit option, including most individuals with special needs living in both the community and long-term care settings. Other groups can be required to enroll in the new benefit option, including most generally healthy children and certain adults (e.g., some parents and childless adults with no disability).

Key Concepts in Understanding How Care Is Delivered Under Medicaid

There are two major types of service delivery systems under Medicaid — fee- for-service and managed care. These two approaches to delivering services to Medicaid beneficiaries differ in important ways across several key dimensions, including:

• choice of providers for beneficiaries,
• how much professional management and coordination of medical care is provided,
• which entity has direct oversight responsibilities for service delivery,
• how states pay providers for services rendered, and assuring access to and quality of care.

In many cases, these two delivery systems are not entirely independent approaches to providing medical care under Medicaid. In a number of states, there are hybrid models that combine various features of fee-for-service and managed care for a given population or set of interrelated services. At a given point in time, beneficiaries may obtain all their services under a single system of care, or different sets of services under each system simultaneously (e.g., primary and acute care under managed care arrangements, and long-term care such as home health services or on- going rehabilitative services under the fee-for-service delivery system). Each of these features of delivery systems is described in more detail below.

Major Features of the Traditional Fee-for-Service Model

The fee-for-service (FFS) delivery system was the predominant system of care both within and outside of Medicaid until about the mid-1990s. Under FFS, beneficiaries have unrestricted provider choice; that is, they can seek services from any Medicaid participating provider. Hence, beneficiaries are largely responsible for their own medical care management and coordination.

The term “fee-for-service” evolved as a short-hand way to describe the method used to reimburse providers for services rendered. For Medicaid, payment rates for each type of service are set by the state within broad federal guidelines. The state directly (or through a fiscal intermediary) pays each participating provider for each covered service received by a Medicaid beneficiary. That is, each individual service rendered is paid a specified amount or rate. In essence, there is a one-to-one correspondence or “match” between payments and the quantity and types of care actually delivered.

Major Features of Medicaid Managed Care Models

Until the late 1990s, states had to obtain waivers of certain Medicaid rules to require that Medicaid beneficiaries get their services through managed care. For example, authority provided by Section 1915(b) of the Social Security Act was used by many states to waive the requirements that services be available statewide (so that managed care could be implemented in specific sub-state regions), and that beneficiaries have freedom of choice among all Medicaid providers (so that managed care enrollees could be required to receive certain services from a specified subset of managed care providers). Section 1115 of the Social Security Act provides additional flexibility to test benefit package and service delivery innovations. This authority has also been used to implement managed care demonstrations. In FY1998, nearly all states had at least one such waiver for some population subgroups or regions.

The Balanced Budget Act of 1997 (BBA-97; P.L. 105-33) eliminated the need for waivers that many states complained were unnecessarily complex and time- consuming. BBA-97 also included managed care provisions that established standards for quality and solvency, and provided additional protections for beneficiaries (described below).

Plan Types and Benefits.

Under Medicaid managed care, beneficiaries choose (or are assigned to) a primary plan as a “medical home.” In turn, these plans provide care coordination and management. State Medicaid agencies must contract with at least two plans, or may offer one plan with a choice of at least two plan providers.

Comprehensive, traditional plans like health maintenance organizations (HMOs) make available to enrolled beneficiaries a broad range of preventive, primary and acute care services. Under primary care case management (PCCM) plans, primary care physicians provide basic medical care, and serve as case managers or gate- keepers (via referrals) to specialty care (e.g., mental health services, dental care). Such specialty care may be provided by another managed care entity that offers only specialty care, called prepaid health plans (PHPs), or by providers in the FFS delivery system. PHPs may be limited to certain ambulatory services (prepaid ambulatory health plans or PAHPs) or specific types of inpatient care (prepaid inpatient health plans or PIHPs). A beneficiary’s choice of provider under managed care is restricted; that is, beneficiaries must seek care for specified services from a specified list of plan providers.

Between 1990 and 2002, states increased their use of comprehensive managed care contractors with primarily public enrollment (i.e., more than one-half of the plan’s enrollment was made up of Medicaid, Medicare and SCHIP enrollees) and decreased the use of such plans serving a primarily commercial population (i.e., one- half or less of the plan’s enrollment was comprised of Medicaid, Medicare and SCHIP beneficiaries). As of June of 2004, data from CMS show that despite these trends, nationwide, commercial MCOs outnumbered Medicaid-only MCOs (156 versus 131), and more Medicaid beneficiaries were enrolled in commercial plans than Medicaid-only plans (9.7 million versus 7.8 million).

Payment Methods

Paying for services under most Medicaid managed care arrangements is significantly different from methods used under the FFS delivery system.

Traditional managed care plans, such as HMOs, agree to make available a specified set of services for which the State Medicaid Agency pays a fee on a “per member per month” (PMPM) basis, called a premium or capitation rate. These rates typically reflect the average FFS cost of providing care to specified groups (or subgroups) of beneficiaries expected to enroll in the plan. Such premiums are paid each month, regardless of the quantity or types of contracted care actually rendered to enrolled beneficiaries. Because the PMPM rates and the number and type of beneficiaries to be enrolled are generally known in advance, managed care expenditures, for both the plans and the State Medicaid Agency, are more predictable than FFS payments and budgets can be set accordingly. PHPs also involve capitated payments, but for limited benefit packages (e.g., inpatient substance abuse treatment, dental care, transportation).

Traditional managed care plans and PHPs must actively “manage” care for plan beneficiaries to control their financial risk. Such plans face a financial loss if more care is rendered than the agreed upon capitation rate accommodates. Conversely, if less care is rendered than is assumed in the premium, the plan will experience a financial gain. Overall, the economic incentive is to deliver less care or less costly care, so long as beneficiary health is not compromised as a result. That incentive may be passed on to contracted medical providers, such as physicians and hospitals, via what is sometimes called sub-capitation (i.e., when plans pay their contracted providers a capitation rate for all or a selected subset of services) or via other kinds of financial rewards/penalties for performance.

In contrast, the payment methods under the PCCM model are a blend of both FFS and traditional managed care. The majority of expenditures associated with PCCM programs are FFS payments. The case manager (i.e., an internist or pediatrician) is paid a small, pre-set monthly fee (e.g., $2 to $3) per enrolled beneficiary to handle coordination of, and referral for, other services, particularly specialty care. In addition, the case manager is typically paid on a FFS basis for direct delivery of basic primary care to his/her enrolled beneficiaries, as are the medical specialists to whom a referral is made.

The PCCM model of managed care has sometimes served as a first step toward more traditional models of managed care such as HMOs. In addition, PCCM programs have been implemented in rural areas where no traditional managed care plans operate, given few potential beneficiaries. PCCM programs may also be used for populations that frequently need a broad range of specialty care services (e.g., individuals with disabilities).

Oversight Responsibilities Under the Medicaid Managed Care and Fee-for-Service Delivery Systems

Under managed care, oversight responsibilities are shared among the State Medicaid Agency, the managed care plans, and the plan providers. The State Medicaid Agency has direct oversight of its contracted managed care plans, and establishes payment rates for these entities, as well as the parameters governing the amount, duration and scope of benefits covered in these contracts, in accordance with federal and state requirements. Similarly, the managed care plans have direct oversight of the plan providers. These plans set medical care and referral policies, in accordance with the contractual agreement negotiated with the State Medicaid Agency. The plans also determine payment methods and rates for plan providers. The providers deliver or prescribe medically necessary care to plan beneficiaries within the guidelines specified by the managed care plan. The specific details of a given state/plan/provider arrangement may vary from this generic scenario. Also, State Medicaid Agencies typically directly oversee PCCM programs as well, although some states contract with administrative service organizations (ASOs) to help administer these programs.

Under the FFS delivery system, there is no plan “middle man.” Generally, the State Medicaid Agency deals directly with all Medicaid participating providers statewide, in terms of both medical care policies (e.g., amount, duration and scope of covered benefits) and setting payment methods and rates specific to different types of providers (e.g., hospitals versus physicians versus physical therapists).

Access to and Quality of Care Under Medicaid Managed Care and the Fee-for-Service Delivery Systems

There are several requirements in federal statute to assure access to and quality of care under both the Medicaid FFS and managed care delivery systems. Some of these requirements are very general and broad, while others, particularly for nursing facilities, are detailed and specific. Examples of such assurances include the following:

• Services must be provided in a manner consistent with simplicity of administration and in the best interest of the recipients (Section 1902(a)(19));
• States must assure that payments are consistent with efficiency, economy, and quality of care, and are sufficient to enlist enough providers so that care is available at least to the same extent that such services are available to the general population in the geographic area (Section 1902(a)(30)(A));
• A medical evaluation and a written plan of care is required for certain people and services (Section 1902(a)(26)); and
• States must regularly survey and certify nursing facilities to ensure that such care meets certain standards for staffing and service delivery, as well as to assure that resident rights are protected (Section 1919).

When BBA-97 was passed, there was a lot of concern that beneficiaries may be harmed under managed care without additional significant safeguards. Thus, there are many additional requirements for assuring access to and quality of managed care under Medicaid. For example, the federal statute includes provisions requiring plans to

• assure coverage of emergency services under managed care (Section 1932(b)(2));
• have a system in place to address grievances (Section 1932(b)(4));
• demonstrate adequate capacity and services (Section 1932(b)(5)); and
• meet a series of quality assurance standards (Section 1932(c)).

Who Receives What Services at What Costs by Delivery System

Enrollment Patterns

Nationwide, enrollment in Medicaid managed care has increased considerably over time. In June of 1996, 40.1% of 33.2 million Medicaid enrollees, at that point in time, participated in some form of managed care. Eight years later, that proportion had increased to 60.7% among 44.4 million Medicaid eligibles enrolled in June of 2004.

Counting the number of Medicaid beneficiaries enrolled in various forms of managed care is difficult for several reasons. Beneficiaries may receive managed care services under multiple arrangements within one year. For example, some individuals may be enrolled in a PCCM program for part of the year, then switch to an HMO for the remainder of the year. Other individuals may be enrolled in an HMO or PCCM program for their primary care and simultaneously receive specialty services from one or more PHPs (e.g., for mental health care and/or dental services). A variety of other scenarios are also possible. To obtain unduplicated counts of beneficiaries by type of managed care experience, we examined person-level patterns of payments using a special FY2003 Medicaid claims database provided to CRS by the Centers for Medicare and Medicaid Services (CMS), the federal agency that administers the Medicaid program.

In descending order of frequency, among the roughly 52 million Medicaid beneficiaries nationwide that had any payments made on their behalf in FY2003:

• 64% (33.3 million individuals) had managed care expenditures,
• 22% (11.5 million beneficiaries) had managed care payments made for HMOs only,
• 18% (9.5 million people) had managed care expenditures for both HMOs and PHPs,
• 11% (5.9 million) had managed care payments for PCCMs only,
• 10% (5.0 million) had managed care expenditures for PHPs only, and
• 3% (1.6 million) had managed care payments for other combinations of the three types of managed care.

Policy Issues for Medicaid Managed Care: Where do We Go From Here?

Nationally, most Medicaid beneficiaries participate in some form of managed care. However, benefit expenditures under Medicaid, especially for long-term care services, still largely occur in the FFS delivery system. State variation in the proportion of beneficiaries and expenditures associated with managed care is the rule rather than the exception. Such variation is likely due at least in part to political, geographic, and market considerations unique to each state.

States continue to redesign their Medicaid programs and experiment with managed care via waiver authority. In addition, states may rely on managed care delivery systems for the new Medicaid benefit package option now available through DRA (described above). Recent examples include new programs in Florida using Section 1115 waiver authority, and Idaho, Kentucky and West Virginia, all using the DRA benefit option. Whether via waiver or the DRA option, these new programs provide access to a different set of tailored benefits for different groups of beneficiaries, based on their anticipated health care needs, rather than giving all beneficiaries access to the full range of Medicaid services covered in each state.

Groups participating in these new programs include not only healthy children and adults, but in some cases, also the elderly and individuals with disabilities living in the community and those needing institutional care. Most programs will start off in a subset of counties. Some programs will allow beneficiaries to “opt out” of the new Medicaid benefit plans and enroll in employer-sponsored or private health insurance subject to capped payments (e.g., Florida, Kentucky) or remain in traditional Medicaid (e.g., Idaho). Incentives such as access to additional benefits or credits for purchasing other goods and services may be offered to encourage healthy behaviors (all four states). Access to enhanced benefits may be subject to certain conditions such as signing a member agreement to fully comply with recommended medical treatment and wellness behaviors (e.g., West Virginia). All four states expect to use managed care delivery systems in these new programs.

Although managed care under Medicaid holds the potential for providing coordination and management of a variety of medical and related health services for beneficiaries, that potential has been largely limited to sub-populations of generally healthy adults and children. Significant challenges still remain for serving the elderly and individuals with disabilities under traditional models of managed care, most likely because of the wide range and intensity of services they require to meet their on-going special health care needs. Relative to other services, long-term care is expensive and an individual’s need for such care may change repeatedly over time. For states that want to save money on long-term care under Medicaid, these factors make setting adequate per-person-per-month payment rates difficult, in turn leading to an inability to attract managed care plans to this market. In addition, many mainstream managed care plans lack experience with both these special needs populations and with delivering long-term care services.

How successful has Medicaid managed care been in reducing program costs and providing beneficiaries with better, coordinated care? This report is not intended to provide a detailed review of this literature. However, there is some evidence that savings can be achieved through Medicaid managed care. For example, in one analysis synthesizing results from 14 studies, the Lewin Group17 concluded that (1) comprehensive, prepaid managed care plan models typically yield cost-savings compared to program costs under a FFS model, (2) savings can be gained in programs that serve individuals with disabilities, and (3) although cost savings is largely attributable to decreases in inpatient utilization, some savings is also associated with moving prescribed drugs from the FFS setting into managed care.

There is also some evidence that Medicaid managed care plans are not as effective as employer-based or Medicare plans, but some improvements have been observed in recent years. For example, the National Committee for Quality Assurance (NCQA) regularly publishes reports for commercial (i.e., employer- based), Medicare and Medicaid managed care plans. Table 9 shows a few examples of the 40+ measures voluntarily reported to NCQA by more than 500 health plans for 2005. In general, higher percentages represent greater effectiveness of care and member satisfaction.

On the selected effectiveness of care measures for preventive services, acute medical care and mental health services, the ratings for commercial and Medicare plans exceed those for Medicaid plans. Nonetheless, very similar (high) ratings were observed for both Medicaid and commercial plans on two acute care measures — appropriate treatment for children with upper respiratory infection and persistence of beta-blocker treatment after a heart attack. All three types of plans struggled with antidepressant medication management, probably reflecting the challenges of helping persons with severe mental illness regardless of the public or private sector health care system involved. Member satisfaction measures were consistently high for Medicaid plans.

NCQA noted that regional differences in plan performance are large as are variations within each plan type (e.g., among Medicaid plans). Thus, attaining high quality in managed care is an on-going, continuous process for Medicaid, commercial and Medicare plans.

Building on the reforms introduced in BBA-97, what additional role can Congress play with respect to managed care under Medicaid? For example, Congress could elect to expand the use of Medicaid managed care to address some of the issues identified in this report, in particular with respect to managed long-term care, and with holistic integration of primary, acute and long-term care for special needs populations. Congress could also choose to monitor and evaluate access to and quality of Medicaid managed care programs, as well as assess the short- and long- term costs and savings attributable to various forms of managed care for different sub-populations of Medicaid beneficiaries.

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