Marketplace changes have an effect on Medicaid managed care

Medicaid reforms advanced by the Bush administration will do little to resolve basic problems confronting Medicaid managed care as a result of significant changes now under way in the managed care marketplace, says Robert Hurley, PhD, an associate professor in the department of health administration in the Medical College of Virginia at Virginia Commonwealth University in Richmond, who reported on his analysis of the marketplace changes in the fall 2002 issue of Health Care Financing Review.

"The short answer is No,’" Mr. Hurley told State Health Watch when asked if the administration proposal addresses the issues raised in his paper. "The administration seems to be saying, We can’t afford to give you money, so we’ll give you flexibility instead.’ That’s pretty hollow at this time given the order of magnitude of the problems in the states."

Mr. Hurley’s analysis, conducted with Debra Draper, senior health researcher for Princeton, NJ-based Mathematica Policy Research, shows current trends in the broader managed care marketplace "are casting a shadow over Medicaid’s ability to sustain its commitment to and momentum in expanding enrollment in managed care models. The trends include a significant backlash among providers and consumers, major changes in product design and features, and a growing sense that the cost-containment capacity of managed care plans is slipping away."

Commercial managed care plans are retaining fewer of the features that first distinguished them from fee-for-service payment models, according to Mr. Hurley, and also are showing a declining interest in public-sector markets. He says these developments raise doubts about whether state Medicaid agencies can continue to get from managed care what they have sought and whether health providers will continue to participate in public-sector lines of business.

Relevant changes in the commercial sector, Mr. Hurley says, include:

  • emphasizing profitability rather than growth;
  • greater use of less-restrictive products;
  • modified efforts to manage utilization;
  • consumer cost sharing, provider contracting pressure, and consumer-directed products;
  • sharply rising premiums.

Each of those trends in commercial managed care has implications for Medicaid managed care, he says. First, a renewed pursuit of profitability by plans means that they are carefully evaluating the performance of all their products with an eye to dropping business that is no- or low margin.

Mr. Hurley says that many commercial plans that came into the Medicaid market have not experienced increased negotiating leverage with providers, despite membership growth, because they have had to expand existing networks to incorporate traditional Medicaid providers to respond to state agency and consumer preference. Also, plans that tried to modulate their Medicaid exposure by keeping membership relatively modest discovered that the administrative costs associated with the program were disproportionately high, relative to small-scale membership and the limited profitability prospects Medicaid represented. It appears that the percentage of beneficiaries in predominantly or exclusively Medicaid plans is approaching 50%, he adds.

Second, Medicaid agencies have accepted the notion of tight network managed care products more than in the commercial sector, so long as required access and capacity standards are met.

Third, Medicaid agencies have traditionally relied on mechanisms such as prior authorization to impose utilization and cost control on providers and beneficiaries.

"While they understand the dissatisfaction these have engendered," Mr. Hurley writes, "they also value their contribution to promoting appropriate service delivery and have not advocated for their modification as strongly as private purchasers."

He points out that the state agency perspective on primary care gatekeeping is even more at variance with private-sector buyers as enrolling beneficiaries with a primary care provider has made the concept of a medical home a reality.

"Many states that have enrolled chronically ill and disabled beneficiaries in managed care have maintained the gatekeeper model," he writes, "but have commonly permitted specialty physicians to play this role. Consequently, discontinuation of primary care gatekeeping as a core element in managed care plans is not a welcome development in the eyes of many Medicaid purchasers."

Fourth, Medicaid regulations place constraints on the ability of states to make use of copayments and other cost-sharing techniques. While some states have been able to make use of them in waiver programs or expansion populations, the yield from using the mechanisms is unclear, and Mr. Hurley suggests there are significant risks associated with imposing them too aggressively on low-income populations. For instance, recent research has suggested that even very modest copayments for drugs can represent impediments to access, and other studies have indicated that the services people are most likely to skip because of copayments are preventive and maintenance services, the absence of which may contribute to increased costs over a longer term.

"Unlike private insurance where cost sharing is used to steer consumers to low-cost plan options or to encourage them to spend their own income for discretionary services, Medicaid agencies find it difficult to rely on managed care products that use extensive cost sharing to control cost and service use," he says.

Medicaid agencies can’t change

While Medicaid agencies, like their commercial counterparts, may want to have broader networks and improved provided payments, in a practical way, it often is beyond the reach of most Medicaid programs. "The tradition of low provider participation and dependence on those providers that, by virtue of mission, tradition, and location, have served Medicaid beneficiaries has conditioned Medicaid purchasers and beneficiaries to accept narrow networks," says Mr. Hurley. "Efforts to enroll beneficiaries in predominantly commercial health plans generally have not succeeded in expanding access to more mainstream providers, in part, because these plans typically have lower payment schedules for the Medicaid product relative to commercial products. Beneficiaries’ preference also plays a role, as they may prefer to see providers that are familiar and geographically closer to their places of residence."

Despite the growing interest in consumer-directed health plans on the commercial side, the concept is not likely to grow in Medicaid. Mr. Hurley says that some type of voucher program would be needed to give beneficiaries more involvement and a greater economic stake in which plans they choose and which benefits they want to buy. "Beyond the administrative complexities are genuine concerns that a model that converts benefits to cash for low-income persons would encourage them to spend money on other basic needs and neglect health care coverage," he says. "In this instance, providers may be at risk for sharp increases in uncompensated care if beneficiaries forego coverage, but erroneously assume they have access to comprehensive services when needed."

Finally, sharply rising premiums, Mr. Hurley says, present a problem for all purchasers and, depending on the extensiveness of cost sharing, also on consumers. The problem is magnified in Medicaid, given fiscal constraints in general and the more severe limitations encountered during budget crises. If states administer payment rates, rather than negotiate them, they may find there are no plans willing to accept rates that fall well short of cost increases or are substantially lower than what can be negotiated with private payers. If states engage in negotiation or competitive bidding with negotiation, as many do, such negotiations become increasingly difficult in periods of economic downturn when reduced tax revenues restrict payment increases.

Mr. Hurley reports that plans with limited commitment to the Medicaid product line are the first to flee when payment falls short of expectations. But even those with strong commitment to and investment in Medicaid are sorely tested because they have limited control over their input costs.

He contends that because managed care has delivered value to Medicaid agencies and beneficiaries, "the decline and transformation of the industry is cause for serious concern and strategic and tactical responses to preserve these gains. . . . The prospect of losing progress made in guaranteed access, improved care management and coordination, contractually based performance guarantees, and data for monitoring and measuring change motivates state Medicaid agencies to devise a variety of responses."

HMOs still have a place

Some states remain committed to maintaining a program based on a prepaid health plan, Mr. Hurley says, indicating that the traditional HMO is the way they prefer to serve their beneficiaries. Medicaid actually could become the last purchaser to use the pure HMO model because state agencies are willing to accept the constraints that go with a closed delivery system as a tradeoff for assured access and cost predictability and control, he says. However, Mr. Hurley contends that it is likely such a commitment will lead to greater reliance on predominantly or exclusively Medicaid enrollment plans.

"Key changes to sustain prepaid health plans lie in the areas of maintaining adequate and appropriately adjusted payment rates and devising incentive-based payment arrangements to promote and reward efforts to improve quality and member well-being. While rate-setting remains a contentious issue made more difficult by state revenue shortfalls, many states have made substantial progress in rate-setting methodologies including the incorporation of risk adjustment," he writes. "Increasing sophistication in this area is essential to achieve the oft-cited goal of making sure the money follows the member.’ Incentive-based payments that encourage and compensate for superior or improved performance measures are receiving heightened attention by states. Many states have realized that contracting with prepaid health plans puts in place a foundation for measuring and motivating continuous quality improvement in ways never possible in the traditional unmanaged fee-for-service Medicaid program. Increased emphasis on the importance of actuarial soundness in the rate-setting promoted by the 1997 Balanced Budget Amendment (BBA) regulations should provide added momentum for further progress in this area."

Policy implications cited by Mr. Hurley for the current challenges faced by state Medicaid agencies as the managed care industry undergoes transformation include:

• Rate adequacy.

State fiscal distress will make providing rate increases to plans a problem in the near term, offsetting much of the flexibility gained by the implementation of actuarial soundness in the BBA regulations. Mr. Hurley says that an economic recession with 40% of beneficiaries in prepaid health plans, such as we have today, is unprecedented. He suggests that states with positive experience and relationships with their health plan contractors will make concerted efforts to encourage plans to endure this difficult period with the promise of better payments in the future when the general economic picture improves. Plans likewise will have to ask their provider networks to wait for the economic conditions to improve. "Whether these delicate negotiations will succeed is uncertain," he says.

• Contractual requirements.

Using new flexibility from federal regulations, states may be able to grant health plan contractors some relief through less onerous administrative requirements or less aggressive enforcement of terms or targets, Mr. Hurley says. Such modifications also will have to be subject to negotiations and done in a spirit of deferring compliance until a more normal relationship can be restored.

• Reconsidering and rescoping risk.

Mr. Hurley says that a special case of contract modifications is a reduction in the scope of services for which health plans accept financial risk. He says there are a number of circumstances in which this is already being done, and it is likely to continue, especially in areas where risk is seen as excessive or associated costs are viewed as unmanageable.

• Eschewing mainstreaming.

Mr. Hurley says that one casualty of increased reliance on predominantly Medicaid plans is a desire to use managed care to promote more access to mainstream plans and providers. A key question, he says, will be whether Medicaid-focused plans have the resources and commitment to continue to develop sound and credible care management strategies and comply with contractual demands. Efforts to enroll beneficiaries with greater needs, such as the disabled or chronically ill, may be particularly challenging for the plans because of the added resources and specialized providers needed to serve them.

Mr. Hurley says he doesn’t see how state Medicaid programs will be able to solve their fiscal problems without an increase in the federal match. "Six months from now, we are going to see programs that are really stressed," he tells State Health Watch. "More federal money is going to have to be considered as an option, even for a limited period of time. Even if states have more maneuverability, they will have to face the prospect of cutting eligibility and benefits. Passing things to the states has short-term appeal, but it is a slippery slope."

While he says he can understand why the federal government is hesitant to provide a significant increase of federal dollars, Mr. Hurley says that if the Medicaid program is to be kept intact, that will have to be done. He warns that we are "really on the verge of a snowball effect" in which if there is no abatement in the increase in health care costs and states have to find the money themselves to meet coverage obligations, they may lose plans and providers, which will lead to access problems so that the value of having coverage is diminished.

No more money

Mr. Hurley sees states having to ask plans to tolerate no rate increases until the economy improves sufficiently, and plans having to make the same request to their providers. He warns of a progressive collapse in which some states find they can’t keep sufficient plans participating. "We’re going to have to go through this process to realize what the problem is. In six to nine months, we’ll see the magnitude of the problem."

With some states saying they can’t afford to buy care from plans, Mr. Hurley says there may be movement to re-energize community health centers to ensure that people have some point of access to care.

[For a copy of the study report, go to: Contact Mr. Hurley at (804) 828-1891 or]