Medicaid Managed Care

By Sarah Ellerman
Illustration by Malcolm Garris/PhotoDisc
August 17, 1998

In the early part of this decade, managed care programs for the poor looked like a win-win situation for both the government and HMOs. The government was happy with the HMOs’ low costs, the HMOs were happy to expand their membership, and everyone was in favor of getting Medicaid beneficiaries quality health care. But as times have changed, HMOs in some states have called it quits, mostly citing the fact that they cannot deliver quality care at the reimbursement rates prescribed.

And while some say that HMOs are giving up on the poor by dropping Medicaid services, the reality is considerably more complex.

State differences

HMOs in a number of states, including New York and Pennsylvania, have withdrawn from the Medicaid markets because they have found that reimbursement rates are not matching the cost of caring for these populations.

But this trend hasn’t surfaced in the Golden State. "It’s a nonstory in California," said Maureen O’Haren, executive vice president of the California Association of Health Plans. Ken August, a Medi-Cal spokesperson, agreed and said that Medi-Cal continues to see healthy competition among HMOs for its contracts. According to industry experts, California has helped create a successful environment for HMOs by maintaining its reimbursement rates.

But don’t get too comfortable.

"You cannot say enough about the variability of Medicaid programs," said Robert Hurley, PhD, an associate professor at Virginia Commonwealth University in Richmond who has been studying Medicaid managed care for 15 years. Craig Pulaski, a spokesperson for the Health Care Financing Administration, which oversees Medicaid, acknowledged that HCFA gives states considerable flexibility in shaping their own plans. Among states, payments, coverage, and regulations all vary.

While California HMOs continue to serve the Medicaid market, it is possible that someday they could pull out. "It could happen and is worth speculating about," said Stephen Somers, PhD, president of the Center for Health Care Strategies, a nonprofit organization affiliated with Princeton University that serves as a resource center on Medicaid and managed care. "The question that it raises is: Are you, the states, going to create a second-tier system again for Medicaid?"

Medicaid mills?

It’s no secret that Medicaid is notoriously difficult to administer. Patients regularly drop in and out of plans because of fluctuating income levels, and beneficiaries run the gamut from healthy children to chronically disabled adults. They may have unique needs in terms of transportation or translators. Concerns about returning these difficult-to-administer patients to "Medicaid mills," plans that serve only Medicaid beneficiaries, may be justified, say experts. Last year the federal government removed the "75/25 rule," which required that managed care plans limit their Medicaid and Medicare enrollment to less than 75 percent, along with other provisions that protected beneficiaries.

Nationwide, there are already a number of plans that predominantly serve the Medicaid community. On the plus side, these plans have developed significant expertise in treating this unique population, but they also run serious business risks, experts say. Since they depend on a single source of revenue—Medicaid reimbursements—changes in rates have a dramatic impact on their business. Managed care organizations with high Medicaid enrollment also lose the opportunity to have more profitable divisions subsidize their Medicaid operation. Finally, rates that might be dismissed as inadequate by experienced HMOs can sound attractive to neophyte HMOs, raising the possibility that underdeveloped or inexperienced plans might gravitate toward serving the Medicaid population.

The inescapable fact about HMOs is that they are businesses—often accountable to shareholders—and they must closely examine the bottom line. "Participation of health plans in Medicaid and Medicare is not mandatory," Hurley said. "As long as health plans decide that they can’t be successful in these lines of business, it’s hard to imagine that you can’t let them walk away."

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