A most dangerous game: Medicaid plans and states rely exclusively on each other for payments, enrollees

Think of it as state Medicaid programs and Medicaid-heavy HMOs putting all their eggs in each other’s baskets.

That’s what’s happening as health plans serving a mix of private and public enrollees withdraw from the Medicaid managed care market, leaving government payers increasingly dependent upon so-called "safety-net" health plans. At the same time, the plans serving exclusively or almost exclusively government-funded enrollees also find themselves in a precarious position.

"These organizations are highly dependent upon a single line of business, a single source of revenue, and that creates enormous vulnerability for them," says Robert Hurley, PhD, an associate professor of health administration at Virginia Commonwealth University (VCU) in Richmond, VA.

The percentage of health plans with a Medicaid membership of 75% or more grew between 1992 and 1996 from 10.8% to 17.8%, according to a recent study Mr. Hurley conducted with Michael McCue and other colleagues at VCU.

The chief of a safety net health plan in New York City recognizes that her reliance on state funding makes her "very vulnerable."

"We have only one payer," explains Maura Bluestone, president and executive director of The Bronx Health Plan. Approximately 80% of the 37,000 members in Ms. Bluestone’s 13-year-old plan are covered by Medicaid; 20% are covered by other government programs. Reserves have gotten the plan through deficits in 1996 and 1997 without cutbacks in services, but building a network is challenging with fewer dollars for provider payments.

"We’re getting less, so we have to pay a little less," she says.

A separate analysis bears out Mr. Hurley’s concern over safety-net plans. Some 70% of Medicaid-only plans lost money in 1997, according to preliminary data from a study funded by the Robert Wood Johnson Foundation. Among the plans that had a mix of Medicaid and other payers, the proportion that lost money ranged from 48% to 57% (see chart, below).

"The ones that are Medicaid-only are in trouble," says Bradford Gray, PhD, a researcher with the New York Academy of Medicine in New York City.

At the same time, Ms. Bluestone misses the "healthy competition" that the commercial plans once brought to the Medicaid market in New York City. In her market, she says, HIP is the only remaining HMO with sizable membership in both the commercial and government markets; remaining plans serving Medicaid enrollees "are staying in because they have to.

"Healthy competition is good for all of us. It does help to have pressure, and it’s easy for that pressure to go off if the state doesn’t have any alternative good players," Ms. Bluestone says.

The Washington, DC-based American Association of Health Plans recently organized long-time Medicaid managed care plans to call attention to the threat they face from declining reimbursements and increasing administrative burdens.

"There’s been quite a lot of discussion in the last six months about Medicare and the plans pulling out," observes AAHP spokeswoman Susan Pisano. "There’s been relatively little attention to the fact that the same problems are happening to Medicaid."

The Bronx Health Plan officials say they are chafing under reporting requirements, mandates regarding how care should be provided, and "admirable but highly ambitious" service levels in areas such as access, outreach, and education.

"State and federal regulators are turning to managed care to quickly remedy three decades of failed public programs," Ms. Bluestone said in a prepared statement.

Raising the profile of problems facing Medicaid plans does not signal an impending exit if reimbursement and other issues aren’t addressed, says AAHP’s Ms. Pisano. "They’re not saying they’re going to pull out this year. They’re not saying they’re going to pull out next year. They’re saying they can’t go on indefinitely."

What matters most

A plan’s profit/nonprofit status and the proportion of government-funded enrollees probably don’t affect the quality of care the plan can provide, Mr. Hurley says.

"What’s probably more important and more central, of course, is competence, commitment, and stability," Mr. Hurley told participants at a January Congress on Managed Medicare and Medicaid.

"The organizations that are providing these services have to know what line of business they’re in, they have to know what they’re doing, they have to be committed to it, and they have to be prepared to be in the line of business for a sustained period of time. Otherwise, they make poor contractors."

Giving capitation to safety-net providers merely raises the stakes in an already dangerous game, says Mr. Hurley. It is up to state officials to ensure that capitated plans have the financial wherewithal to meet their obligations.

"Safety-net providers who bear full risk could in fact fail, and in their failure jeopardize their capacity to be a provider. We haven’t seen this happen yet, but it’s looming out there on the horizon. It’s certainly the nightmare of many public regulators. It also should be the nightmare of many advocates who want to preserve the capacity of these providers to serve the uninsured."

Mr. Hurley is particularly concerned about the viability of provider plans, especially those sponsored by hospitals. He notes that in recent years the proportion of HMOs that are profitable has plummeted while the profitability of hospitals has stayed high.

"I think they continue to be in competing businesses. We have to still continue to ask the question whether or not hospitals can and should be in the HMO business," he says.

The increasing concentration of Medicaid enrollees in plans that cater to government payers makes Mr. Hurley pessimistic about reaching that Holy Grail of a single tiered system. The demographics and geographic dispersion of Medicaid enrollees may make such a goal "impractical, if not impossible," he says.

"I think many of those who thought 10 years ago that Medicaid managed care could be a bridge or a vehicle to achieve a degree of mainstreaming have to come to grips with the fact that this hasn’t been the case, and may never be the case."

Contact Mr. Hurley at (804) 828-1891, Mr. Gray at (212) 822-7286, Ms. Bluestone at (718) 733-4747, and Ms. Pisano at (202) 778-3200. Mr. Hurley’s study is found at: McCue MJ, Hurley RE, Draper DA, et al. Reversal of fortune: Commercial HMOs in the Medicaid market. Health Affairs 1999; 18:223-230.