Department  of Health  and  Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
Retooling  State  Medicaid  Agencies 

For 

Managed  Care 

JUNE GIBBS  BROWN 
Inspector  General 
August1997 
OEI-01-95-00260  OFFICE  OF INSPECTOR  GENERAL 
The mission  of the Office of Inspector  General  (OIG), as mandated  by Public Law 9542,  is to 
protect  the integrity  of the Department  of Health and Human  Services  programs  as well as the 
health  and welfare  of beneficiaries  served by them.  This statutory  mission  is carried  out through  a 
nationwide  program  of audits,  investigations,  evaluations,  sanctions,  and fraud alerts.  The 
Inspector  General  informs  the Secretary  of program  and management  problems  and recommends 
legislative,  regulatory,  and operational  approaches  to correct  them. 
OFFICE  OF EVALUATION  AND  INSPECTIONS 
The OIGs Office of Evaluation  and Inspections  (OEI) conducts  short-term  management  and 

program  evaluations  (called inspections)  that focus on issues of concern  to the Department,  the 

Congress,  and the public.  The  inspection  reports  provide  findings  and recommendations  on the 

efficiency,  vulnerability,  and effectiveness  of departmental  programs. 

OEIs Boston Regional  Office prepared  this report under  the direction  of Mark R. Yessian,  Ph.D., 

Regional  Inspector  General.  Principal  staff contributing  to the report  included: 

Boston  Region  Headaunrters 

Joyce  M. Greenleaf  Jennifer  Antic0 

Dana L. Miller 

Russell W. Hereford 

Lynne  Hostetter 

To obtain a copy of this report,  please contact the Boston Regional  Office by telephone  at 
(617) 5651050  or by fax at (617) 5653751.  EXECUTIVE  SUMMARY 
PURPOSE 
To identify  the major  organizational  challenges  State Medicaid  agencies  face as they  shift 
their  focus to managed  care and to offer  preliminary  assessments  of how the agencies  are 
responding  to these challenges. 
BACKGROUND 
At a rapid pace,  most State Medicaid  programs  are shifting  their  enrollees  from  traditional 
fee-for-service  health  care to managed care arrangements.  These  still evolving 
arrangements  include  primary  care case management  (PCCM),  comprehensive,  full-risk 
managed  care,  and capitated  carve-outs  of particular  services,  such as mental  health. 
For  the Medicaid  agencies,  this transition  is fundamental.  They  are faced with retooling 
themselves,  much like private  corporations  do when entering  new markets  or introducing 
new product  lines.  This  inquiry  defines  the key challenges  these agencies  face in making 
this adaptation  and offers  feedback  on how they are meeting  them.  It is based on a review 
of the experiences  of  10 State Medicaid  agencies  strongly  committed  to managed  care. 
MANAGED  CARE PENETRATION 
The degree  and type of Medicaid  managed care penetration  in the State has a major 
bearing  on the organizational  challenges  facing  a Medicaid  agency.  The  more  that 
Medicaid  beneficiaries  are enrolled  in managed care of any kind and in full-risk  managed 
care in particular,  the more that agency  management  finds itself compelled  to uproot  its 
fee-for-service  infrastructure  and develop  new organizational  tasks,  roles,  and structures. 
We have identified  three  stages of penetration.  Stage III represents  what we call the 
breakthrough  point.  At that point,  nearly  all Medicaid  enrollees  are in full-risk  managed 
care.  Staff redeployment  is extensive.  The fee-for-service  sector no longer  dominates. 
Only  1 of the  10 agencies  has reached  this stage.  Among  the others,  five are in Stage I, 
four in Stage II. 
CHALLENGES  AND RESPONSES 
We have identified  five  major  organizational  challenges.  They  are by and large 
sequential.  Most States have considerable  experience  in addressing  the first two,  but have 
barely  begun  to address  the last three  challenges.  Below we present  the challenges  and 
characterize  the agencies  responses  to them. 
i  Establishing  core developmental  teams. 
The agencies  have experienced  much success in establishing  teams drawn  almost  entirely 
from  staffs of Medicaid  and other  State agencies.  A downside  is that they tend to be 
isolated  from  the fee-for-service  operations,  making  it more difficult  at times to carry  out 
budgeting  and other  agencywide  functions. 
Acquiring  necessary  knowledge  and  skills. 
The agencies  have made extensive  use of consultants  for ratesetting,  computer 
modifications,  and other  functions.  Few agency  staff have experience  in the managed  care 
industry.  With  outmoded  State personnel  systems and minimal  investments  in staff 
training,  the agencies  face significant  constraints  developing  sufficient  staff expertise. 
Instilling a new mission and  culture. 
In most cases,  this challenge  has barely  been addressed,  with staff concerns  mounting. 
Some promising  strategies,  however,  are apparent.  One is to foster  value-purchasing  as a 
goal pertinent  to both  fee-for-service  and managed care  sectors.  Another  is to organize 
work  units in ways that integrate  roles across  the two sectors. 
Redeploying fee-for-service  staff. 
Once again,  this challenge  has barely  been addressed.  In nearly  all States,  the heaviest 
users of health  care  services  remain  concentrated  in fee-for-service  sector,  thereby 
minimizing  opportunities  for staff redeployment.  But pressures  to move in this direction 
are building  as managed  care enrollment  accelerates. 
Avoiding  a fee-for-service  meltdown. 
Some danger  signs are apparent.  Less innovation,  lower  morale,  and slower  responses  in 
Medicaid  fee-for-service  sector jeopardize  Medicaid  service  and oversight  roles.  These 
danger  signs are especially  apparent  with respect  to the following  traditional  fee-for-
service  functions:  third-party-liability,  surveillance  and utilization  review  systems,  and 
drug utilization  review. 
RECOMMENDATIONS 
In State Medicaid  agencies,  State legislatures,  and the Health  Care Financing 
Administration,  retooling  has been a low-priority  issue.  In each sector,  the focus has been 
on the substance  of managed  care efforts  and on their effects  on providers,  beneficiaries, 
and taxpayers. 
As Medicaid  agencies  approach  and enter  Stage III,  they will be compelled  to devote  more 
attention  to the retooling  issue.  The HCFA,  as the Federal  partner  in the Medicaid 
11  program,  can encourage  and help them to address  this issue constructively.  Our 
recommendations  are made in that context. 
The HCFA  should provide forums  to help  State Medicaid  agency  managers  take 
advantage  of the opportunities  managed  care presents for  retooling  their agencies  and to 
minimize the associated dangers. 
These  forums  could be at the national  level,  through  the establishment  of a work group  or 
technical  advisory  group,  as well as at regional  levels,  through  the efforts  of regional 
offices. 
The  HCFA  should  revise its review and monitoring  protocols  so that they devote greater 
attention to how State Medicaid  agencies  are handling  the organizational  challenges 
associated  with expanded  managed  care. 
Particularly  as agencies  approach  and enter  Stage III,  it is vital  that the retooling  issue be 
taken off the backburner,  where  it typically  resides,  and be given  major  attention.  The 
HCFA  can encourage  such change by giving  greater  attention  to the organizational 
challenges  when it reviews  State agency  plans and activities. 
The  HCFA,  in its ongoing  reviews of State Medicaid  agencies,  should  scrutinize possible 
adverse  effects  of managed  care  expansion  on the performance  of established fee-for-
service functions. 
This  matter,  we are suggesting,  warrants  special  attention,  especially  as it relates  to the 
third-party-liability,  surveillance  and utilization  review  subsystems,  and drug utilization 
review  functions. 
COMMENTS  ON THE  DRAFT  REPORT 
We solicited  and received  comments  on the draft report  from HCFA,  the Acting  Assistant 
Secretary  for Health  (ASH),  and the Assistant  Secretary  for Planning  and Evaluation.  The 
latter  concurred  with our recommendations  without  further  comment.  The complete  text 
of the HCFA  and ASH comments  appear  in appendix  B.  Below we summarize  their 
comments  and,  in italics,  offer  our response. 
The HCFA  concurred  with the first two recommendations  and partially  concurred  with the 
third.  It noted that ongoing  activities  and action  taken in response  to the first two 
recommendations  would  lessen the need for scrutinizing  possible  adverse  effects  of 
managed  care expansion  on fee-for-service  functions.  In addition,  HCFA  suggested  that 
the States discussed  in the report  be given  opportunity  to comment  on the report  and that 
our reference  to danger  signs in the fee-for-service  sector be changed  to concerns. 
We decided  to retain  the former  term  because  it more  accurately  rejlects  what  we  heard 
and found  in the  study  States.  At the same  time,  as  we  note  in the  report,  we  refer  to 
danger  signs  in the  context  of  early  alerts  that could  emerge  as sign@cant  problems  if not 
adequately  addressed.  As for  obtaining  reactions  from  the  States,  we have  received  and  taken  into account  considerable  comment  from  the  States  in the  course  of framing  our 
jindings  and  recommendations. 
The Acting  Assistant  Secretary  of Health  did not comment  on the specific  findings  or 
recommendations  in the report,  but did offer  four suggestions  that could  enhance  the 
transition  process  to Medicaid  managed  care.  They  are helpful  suggestions  that warrant 
consideration  by the States and HCFA.  They  concern  the involvement  of the State health 
departments  in the managed  care process,  the need for broad  stakeholder  involvement  in 
the process,  the need to strengthen  the integration  of public  health  concerns  into  the 
change  process,  and the importance  of strengthening  compliance,  monitoring,  and 
evaluation  at the State level. 
iv  TABLE  OF  CONTENTS 
PAGE 
EXECUTIVE  SUMMARY 
INTRODUCTION  ........................................... 
MANAGEDCAREPENETRATION  ..............................  . 
CHALLENGES  AND RESPONSES  ...............................  5 

Success in Establishing  Core Teams  .............................  5 

Some Concerns  in Acquiring  Necessary  Knowledge  and Skills  .............  6 

Limited  Progress  in Instilling  New Mission  and Culture  .................  7 

Minimal  Efforts  in Redeploying  Fee-For-Service  Staff  .................  10 

Danger  Signs for Traditional  Fee-For-Service  Functions  ................  11 

RETOOLING  AS AN ISSUE  ..................................  15 

RECOMMENDATIONS  .....................................  16 

COMMENTS  ON THE DRAFT REPORT  .........................  19 

APPENDICES  .............................................. 

A:  Background  on Medicaid  Managed  Care  .........................  A-l 

B:  Complete  Comments  on the Draft  Report  .........................  B-l 

C:  Endnotes  ............................................  .C-1 
 INTRODUCTION 
PURPOSE 
Our purpose  in this inspection  is twofold:  (1) to identify  the major  organizational 
challenges  State Medicaid  agencies  face as they retool  their agencies  to support  the growth 
of Medicaid  managed  care and (2) to offer  preliminary  assessments  of how the agencies 
are responding  to these challenges. 
TRANSFORMATION  OF STATE MEDICAID  AGENCIES 
Most State Medicaid  agencies  are undergoing  rapid transformation.  They  are shifting 
from a traditional  focus on fee-for-service  health  care to one increasingly  defined  by 
managed  care.  The  managed  care arrangements  will involve  any one or mix of the 
following:  (1) primary  care case management  (PCCM),  (2) comprehensive,  full-risk 
managed  care,  and (3) capitated  carve-outs  of particular  services,  such as mental  health, 
substance  abuse,  or dental  services  (see appendix  A). 
In this environment,  the managers  of State 

Medicaid  agencies  face an imposing  new set of 
 State Medicaid Agency 
Managed Care Responsibilities 
responsibilities  that call for them to apply  sound 

business  practices  and remain  closely  attuned  to 
 .  Definingtypeso,managedcc2re, 
the health  care  marketplace.  In both these 

.  Developing  health plan  contracts. 

respects,  they  find little  guidance  in the past 
 .  Negotiating  rates. 

policies  and practices  of their agencies. 
 ,  Educating  benejiciaties. 

.  Educating  providers. 

Ensuring patient  access  to providers, 

In recent  years,  articles,  books,  and reports  have 
 : 
Coordinating  with other  agencies. 
been produced  that explain  these new 

.  Meeting  with stakeholders. 
responsibilities  and that indicate  how the States 
 .  Developing  new duta systems. 
have been responding  to them. * There  has been 
 * Overseeingheazthplans, 
much less attention  to the organizational 

challenges  the Medicaid  agencies  confront  as they 

carry  out their  new managed  care responsibilities.  * 
 Yet, the challenges  are fundamentaL3 
They  call for the agencies  to reengineer  themselves, 
 much like private  corporations  would 
when entering  a new market  or developing  a new product  line.  How well the agencies 
make this adaptation  could  well have a major  bearing  on the long-term  success of their 
managed  care efforts.  It is a matter warranting  further  inquiry.  THIS INQUIRY 
This  inspection  focuses  on the internal  adjustments  facing  State Medicaid  agencies  as they 
move toward  managed  care.  It starts out by addressing  how these adjustments  are 
influenced  by the extent  of Medicaid  managed care in a State.  It then identifies  the major 
organizational  challenges  faced by the Medicaid  agencies  as they  increase  their 
commitment  to managed  care and addresses  how they have been responding  to those 
challenges. 
In tackling  this topic,  we recognize  that any generalizations  about the Medicaid  program 
that cross  State boundaries  can be hazardous.  An often expressed  adage among  Medicaid 
directors  is:  If you have  seen one Medicaid  program,  you have  seen one Medicaid 
program. I4 Yet in a broad  sense,  currents  of change  are apparent  among  the States and 
are helpful  to highlight,  even if they do not adequately  reflect  what is happening  in any 
individual  State.  In our synthesis  observations,  we focus on those currents.  To reflect 
some of the diversity  that exists and to minimize  the danger  of our becoming  too abstract, 
we offer  examples  of developments  occurring  in particular  States. 
Our inquiry  is based primarily  on a review  of the recent  experiences  of  10 State Medicaid 
agencies  that have  made strong commitments  to Medicaid  managed  care.  The  States are 
diverse  in terms of their  location,  size, and experience  with  managed  care.  They  are 
clearly  among  the top half of States in terms of the proportion  of their  Medicaid 
beneficiaries  in managed  care.  For each of the States,  we interviewed  agency  officials 
and reviewed  pertinent  documents.  In three,  we conducted  in-depth  visits  that also 
included  interviews  with representatives  of health  plans,  advocacy  groups,  State 
legislatures,  other  State agencies,  and Medicaid  enrollees. 
Our inquiry  does not address the internal  adjustments  that the move toward  managed  care 
presents  for other  State agencies,  such as those focusing  on mental  health,  public  health, 
mental  retardation,  elder  affairs,  and social  services.  These  adjustments  can be significant 
since Medicaid  often  serves as a major  source of funding  for their  service  operations  and 
since managed  care can lead to major changes  in these operations.  The organizational 
effects  in these other  agencies  warrant  attention.  But with the reverberations  of managed 
care likely  to be most immediate  and consequential  within  in the Medicaid  agencies,  we 
have decided  to concentrate  this inquiry  on them. 
We conducted  this inspection  in accordance  with the Quality  Standards  for Inspections 
issued by the Presidents  Council  on Integrity  and Efficiency. 
2 
 MANAGED  CARE  PENETRATION 
The degree and type of Medicaid  managed care penetration  in a State has a major 
hearing  on the extent of the organizational  challenges  facing the State Medicaid 
agency. 
The challenges  we are examining  in this report  do not occur  in a vacuum.  Both the extent 

and nature  of the challenges  are heavily  influenced  by numerous  factors,  many  of which 

are beyond  the control  of agency  management.  Among  the more important  of these 

shaping  influences  are:  the rapidity  of the movement  toward  Medicaid  managed  care;6 the 

extent  of managed  care in the private  marketplace;7  the extent  of the agencys  prior 

experience  with  managed  care,* the size of the States Medicaid  program;  the 

complexity  of the managed  care program;  and the extent  and manner  in which  other 

State agencies  regulate  managed care organizations. 

As important  as these factors  are,  we learned  that another  factor  is likely  to have a more 

enduring  effect  on the challenges  facing  agency  management  as it seeks to gear  up its 

organization  to carry  out managed care responsibilities.  It involves  the degree  and type of 

Medicaid  managed  care penetration  in a State.  The  more that Medicaid  beneficiaries  are 

enrolled  in managed  care of any kind and in full-risk  managed  care in particular,  the more 

that agency  management  will find itself compelled  to uproot  its well-established  fee-for-

service  infrastructure  and develop  new organizational  tasks,  roles,  and structures. 

Among  the  10 States we reviewed,  we identified  three  key stages of Medicaid  managed 

care penetration  (see table  1): 

TABLE  1 
STAGES  OF MEDICAID  MANAGED  CARE  PENETRATION 
Stage  Managed  Care  Full-Risk  Organizational  Implications  States 
Enrollment  Managed  Care 
Enrollment 
Substantial.  Can  Negligible  to  Modest.  Agency  forms  core  managed  care  MA 
include  majority  moderate.  staff.  Adjustments  in computer  systems,  NY 
of  provider  relations,  and  beneficiary  education.  FL 
caseload.  OH 
MO 
Majority  of  Dominant  mode.  Substantial.  Agency  redefining  itself  as  CA 
caseload.  purchaser  of health  care.  Major  focus on  RI 
enrolling  beneficiaries  and overseeing  health  MN 
plans.  UT 
III  Nearly  all of  Dominant  mode.  Far-reaching.  Agency  reaches  breakthrough  OR 
caseload.  point.  Extensive  staff redeployment.  Fee-
for-service  sector  no longer  dominant. 
- -
3 
 In Stage I, the Medicaid  agency  has made a substantial  commitment  to managed  care--one 

that is likely  to encompass  most or all of the families  with dependent  children  and perhaps 

even  some of the aged,  blind  and disabled  beneficiaries.  Some of these individuals  may 

be enrolled  in full-risk  managed  care,  but most are likely  to be in PCCM  and/or  carve-out 

arrangements.  This  change  calls for some adjustments  in traditional  agency  operations. 

But the reverberations  are relatively  contained  because  the fee-for-service  system  remains 

essentially  intact.  Beneficiaries  in PCCM  and carve-out  arrangements  continue  to receive 

much care from  providers  who continue  to bill Medicaid  for each episode  of ca.re.12 

In Stage II,  the critical  difference  is that full-risk  managed  care becomes  mainstream.  The 

agency  begins  to reposition  itself  as a purchaser  of services  from relatively  few health 

plans rather  than as a payer  of bills  from thousands  of providers.  In one way or another, 

more and more agency  staff are involved  in defining,  supporting,  and overseeing  the work 

of health  plans.  The demands  on the fee-for-service  sector of the agency  begin  to 

diminish  and staff accustomed  to working  on functions  such as prior  authorization  or 

surveillance  and utilization  review  must learn  new roles.  In this milieu,  reorganizations 

are common. 

In Stage III,  full-risk  managed care becomes  even  more dominant  to the point  where  it 

encompasses  many or even  most of the aged,  blind,  and disabled  beneficiaries.  Although 

a minority  of the caseload,  they have accounted  for a majority  of agency  expenditures  and 

claims  processed.  As such,  they have been instrumental  in sustaining  the fee-for-service 

sector of the Medicaid  agency  during  Stages I and II.  As these  high-user  beneficiaries 

join  full-risk  health  plans,  the foundation  of the fee-for-service  operation  begins  to give 

way.  The agency  reaches  a breakthrough  point  that calls for far-reaching  changes  in its 

internal  organization  and in its use of agency  staff. 

4 
 CHALLENGES  AND  RESPONSES 
Our review  of  10 State Medicaid  agencies  revealed  5 major  internal  challenges  they  face 
as they adapt to managed  care.  The challenges,  in essence,  are generic  ones that any kind 
of organization  is likely  to face in making  a fundamental  shift in its products  and modes of 
operation.  In this section,  we explain  the challenges  and the agenciess  responses  to them. 
In large  part,  our discussion  of the responses  offers  further  illustration  of the challenges 
by revealing  the obstacles  confronted  in the implementation  process.13 
Challenge  #l:  Establishing  a Core Developmental  Team 
To chart  the course,  the Medicaid  agencies  must assemble  a leadership  core  that is 
committed  to the managed  care mission,  energized  by the conceptual  and operational 
challenges  it creates,  and determined  to persevere  in the midst of complexity  and 
uncertainty.  This  core  must extend beyond  the level  of politically  appointed  officials  into 
the career  staff of the agency. 
The  formative  stage of managed  care program  design and implementation  can extend  over 
a number  of years.  It is a period  of innovation  requiring  people  at the helm  who thrive  in 
such environments.  The feasibility  and durability  of the reforms  are likely  to be enhanced 
if the leadership  team includes  some individuals  that have been part of the agencys  career 
staff and that are well-steeped  in the operational  and policy  landscape  of the Medicaid 
program. 
b Each of the agencies  has assembled a core of officials  who are strongly  committed 
to managed  care reforms. 
In most of the Medicaid  agencies  we reviewed,  there  is a core  managed  care leadership 
that is highly  committed  to managed  care reforms. l4  The  members  of the team tend to 
see these reforms  as vital  not only  for containing  costs,  but also for improving  the access 
of beneficiaries  to good quality  care.  They  are curious  about the dynamics  of the health 
care marketplace  and about how the agency  can best relate  to it.  They  seek to act as 
prudent  purchasers  of health  care on behalf  of their customers  -- the Medicaid 
beneficiaries. 
The core  staff come almost  entirely  from the fee-for-service  sector of the agency  or from 
other  State agencies.  Staff in the Medicaid  agency  tend to see the managed  care office  as 
the place where  the action  is and as a good place  to get ahead.  Or at least to avoid  losing 
ground.  As one State official  noted:  Everyone  knows that the office  of managed  care 
will be the last place  to suffer any downsizing.  b For the most part, the core staff work in isolation from the fee-for-service  part of 
the Medicaid  agency. 
The fast pace and the frequent  crises  that characterize  managed  care offices  may 
contribute  to their  isolation  from  staff operating  the routine  fee-for-service  operations.  A 
comment  by one managed  care official  echoed  by many of his counterparts  was:  we are 
an island  unto ourselves.   Many  managers  indicated  to us that such separation  is 
necessary  during  the early  developmental  phases of managed  care,  but can become 
dysfunctional  if still applicable  as managed care becomes  more established.  For  instance, 
in one agency,  managers  informed  us that with fee-for-service  and managed  care  staffs 
speaking  very  different  languages,  the job  of budgeting  had become  very  difficult. 
Challenge  #2: Acquiring  the Necessary  Knowledge  and Skills 
As Medicaid  agencies  become  increasingly  committed  to managed  care,  they  must have 
ready  access  to knowledge  bases and skills that are different  than those typically  held by 
their  fee-for-service  staffs.  They  become  particularly  dependent  on expertise  in 
negotiating  contracts  with health  plans,  in developing  and carrying  out quality  assurance 
systems,  and in relating  to stakeholder  groups. 
In the early  period,  developmental,  planning,  and public  relations  capacities  are of great 
importance.  Later,  once  managed care becomes  more mainstream,  monitoring  and 
evaluation  capacities  become  much more significant.  Throughout,  however,  the agencies 
find themselves  with a greater  need for staff with broad  backgrounds  who can understand 
health  care delivery  systems and who can fit the pieces  together. 
b In developing  their managed  care efforts,  the agencies  have been able to tap into 
considerable  expertise. 
Most of the agencies  have relied  heavily  upon consultants,  both  for technical  assistance  on 
matters  such as ratesetting,  contract  development,  and computer  modification,  and for 
ongoing  service  functions,  such as pre-enrollment  education  and actual beneficiary 
enrollment.  In Rhode Island,  the Medicaid  agency  has turned  to a consultant  firm  to carry 
out a central,  ongoing  leadership  role for its overall  managed  care effort. 
The other  State agencies  we reviewed  have relied  more fully  on their  own staffs to 
provide  direction.  In Massachusetts,  the agency  built up a core  staff by bringing  in many 
individuals  experienced  in the managed care industry,  either  directly  with health  plans or 
with employers  purchasing  services  from the plans.  This,  however,  has been the 
exception.  In most of the agencies,  few if any  staff have industry  experience.  Yet, 
mainly  through  on-the-job  training  and trial-by-fire,  many of them have gained 
considerable  know-how  about managed care.  To date,  more of that know-how  seems to 
relate  to purchasing  and contract  development  than to health  plan  oversight.  But that is 
changing  as the number  of Medicaid  enrollees  in full-risk  health  plans continues  to 
increase. 
6 
 b In building  up and maintaining  their  own staff expertise,  the agencies  face 
significant  constraints  that emerge from outmoded State personnel  systems and from 
minimal  investments  in staff development. 
Medicaid  agency  managers  routinely 
complained  to us about State personnel  Californias Broken Civil Service System 
systems  that make it enormously 

difficult  for them to recruit  people  with  Cahfornia s Civil Senice  System  is broken.  Today, 

there are no rewards fi9r outstanding  pe;rfotntance
experience  in the managed  care 
and no consequences for poor  petfonnance.  It is 
industry,  to rotate  agency  staff among 
dijicult  to hire outstanding  applicants,  and it is 
different  positions,  and to give  d@cult  to fire  the  bad apples.    Salary  is based  on 
sufficient  rewards  based on  longevity,  not productivity.  In a rapidly  changing 
performance.  l5  Every  bit as much,  technological  environment,  workers  lack adequate 
training.  It is a topsy-turvy  world  charactetized  by
they  expressed  concerns  about the 
perverse  incentives.  It must be changed.  * 
meager  resources  available  for staff 
development.  Rarely,  for instance,  (From  Competitive  Government:  A Plan for kss 
could  they  even  send an employee  to an  Bureaucraq,  More  Results,  olgice  of the Goverttor,a 
Am-i1 1996.) 
out-of-State  conference. 
Over time,  many officials  stressed,  the consequences  of this situation  become  troubling. 
Capable,  experienced  staff leave.  Some career  staff end up in roles  for which  they are ill-
suited.  Some become  too dependent  for day-to-day  learning  on the staff of the health 
plans which  have contracts  with the Medicaid  agency.  A number  of plan  representatives 
reminded  us that they  regularly  educate  Medicaid  staff about how managed  care works. 
Challenge:  #3: Instilling  a New Organizational  Mission  and Culture 
For  Medicaid  agency  staff accustomed  to the fee-for-service  routines,  managed  care 
portends  fundamental  change.  It means that they must reorient  themselves  to an agency 
that is beginning  to focus on beneficiaries  rather  than on providers  and to define  itself 
more as a health  care purchaser  than a bill payer.  Agency  leadership  must find ways of 
enabling  staff throughout  the organization  to make this transition. 
Toward  the later part of Stage I and into Stage II,  it becomes  increasingly  apparent  that 
managed  care represents  more than marginal  change  affecting  one sector  of the Medicaid 
agency.  In fact,  it looms  as a paradigm  shift,  recasting  the role of the Medicaid  agency 
and most of its workforce.  A before  and after analysis  prepared  by the Minnesota 
Department  of Human  Services  reveals  the extent of this shift  (see table 2). 
7 
 TABLE 2 

PARADIGM  SHIFT FOR MINNESOTA  DEPARTMENT  OF HUMAN  SERVICES 

Components  Old Approach  New Approach 
Agency  role  Service  agency  Service  agency  for non-health 

care/purchaser  for health  care 

Management  approach  Mix of assistance,  Business contractual  relations  for 

collaboration,  regulatory,  health  care purchasing; 

and contractual  collaborative  approach  for  non-

health  care 

Areas of responsibility  Individual  programs  Population  based rather  than 

program  based 

Approaches  to  Regulation  Flexible  strategies  for 

responsibility  contracting  for  specific  results 

Goal  Operating  programs  Assuring  value:  access, 

accountability,  and affordability 

Purchasing  strategy  Reimbursement  of  Managed  competition 

individual  services 
Eligibles  Recipients  Enrollees 

Provider  relationships  Individual  service  Care delivery  network 

providers 
Managed  care  HMOs  Managed  network  care delivery 

contractors  systems 

Accountability  State and provider  Individual,  state,  care delivery 

networks 

Quality  Regulatory  approach  Quality  improvement  systematic 

Purchasing  role  Through  counties  and  Joint  purchasing  strategies 

tribes;  directly  with 
individual  providers 
8 
 b For the most part, the agencies have not yet addressed this challenge. 
The  move toward  managed  care does not occur as surely  and orderly  as our sequential 
schema  may suggest.  Medicaid  agencies  carrying  out PCCM  and/or  full-risk  managed 
care efforts  confront  ongoing  complexities  that concern  policy  design,  operational  detail, 
and political  controversy .  These  realities  almost  invariably  reinforce  a short-term 
perspective,  with little  time for cultivating  strategies  that will  instill  a new mission  and 
culture  in a successfully  transformed  agency. 
In Stage II the consequences  of such inattention  begin  to mount.  Staff who are not yet 
part of the managed  care effort  become  more concerned  about what the effort  will  mean 
for them.  For  instance,  with  many third-party-liability  (TPL) functions  being  passed on to 
health  plans  for their  Medicaid  enrollees,  TPL  staff wonder  how their jobs  will be 
affected.  Will  their  skills be transferrable?  Indeed,  will their jobs  be threatened?  Left 
unanswered,  such questions jeopardize  staff morale  and productivity.  l6 
The consequences  can also be worrisome  for agency  staff who have already  been given 
managed  care responsibilities.  Some of them remain  uneasy  in their  new situations, 
uncertain  about  the implications  or merits of the paradigm  shift noted above.  Some find 
their  instinctive  way of viewing  the Medicaid  program  remains  rooted  in the traditional 
fee-for-service  program.  They  may find it difficult,  for instance,  to adjust to oversight 
roles  that focus on the dangers  of underutilization  in managed  care arrangements  after 
years  of contending  with the overutilization  biases of fee-for-service  systems. 
b Some agencies  have undertaken  what appear to be promising  approaches  to 
encourage  staff acceptance  of managed care. 
In various  ways,  some agencies  are seeking  to deemphasize  the dichotomy  between 
managed  care and fee-for-service  and to foster  integrative  perspectives  that cut across 
these  sectors.  One such approach  is to explain  the agencys  new mission  in such terms. 
For instance,  the Ohio agency  stresses its aim to maximize  its leverage  in the marketplace 
and to get the best possible  deal with respect  to cost,  quality,  and access.  It poses this 
overarching  value-purchasing  goal as one pertinent  to both  the fee-for-service  and 
managed  care  sectors and to hybrid  initiatives  involving  both. 
Another  depolarizing  approach  is to organize  work  units in ways that integrate  roles 
across  the two sectors.  The Minnesota  agency,  for example,  has developed  what it terms 
cross-cluster  project  teams responsible  for basic Medicaid  benefits,  continuing  care  for 
special populations,  health  care purchasing,  and quality  improvement.  The Missouri 
agency  has placed  fee-for-service  and managed care  staff together  in multiple  units,  with 
the intent  to foster  staff buy-in  and to change  the agencys  mission. 
Some agencies  are also furthering  staff buy-in  by hiring  consultants  to help identify  staff 
concerns  and means of responding  to those concerns.  The Oregon  agency,  now in Stage 
III,  used consultants  to help it work  on morale,  relational  and teamwork  issues as it 
9 
 expanded  the scope of managed  care.  More  recently,  the Massachusetts17 and 
Missouri  agencies  have been doing  the same. 
Challenge  #4:  Redeploying  Staff 
Continued  movement  toward  Stage III leads to a point  where  the fee-for-service  workloads 
diminish  and the agencies  must redeploy  significant  numbers  of the fee-for-service  staff 
into  managed  care roles.  Most of these individuals  will have little  preparation  for their 
new roles. 
In each State except  Oregon,  the fee-for-service  sector  still accounts  for the great  majority 
of Medicaid  agency  staff.  In those States,  agency  leadership  faces the enormous  challenge 
of redeploying  much of that staff into managed  care while  maintaining  morale  and 
operating  both  fee-for-service  and managed  care programs. l9 
b Thus far,  most of the agencies  have not reached the point of redeploying  major 
segments  of their fee-for-service  staff.  In fact,  many report that their staffing  needs 
for managed  care have increased  faster than those for fee-for-service  have  declined. 
The fee-for-service  sector caseload  includes  the sickest  individuals  generating  the most 
claims.  As long  as most of them remain  in this sector,  they will continue  to call  for a 
disproportionately  large  share of agency  staff support.  This  slows the pace at which  the 
Medicaid  agencies  can phase down fee-for-service  operations.  So too do other  largely 
unavoidable  factors.  One is what some claims  processing  staff describe  as the  trailing 
effect,  whereby  fee-for-service  claims  for beneficiary  services  come in as much as 1 year 
after beneficiaries  have  shifted  to managed care.  Another  is a temporary,  but sometimes 
significant  increase  in inquiries  to provider  relations  staff from providers  seeking 
clarifications  about the implications  of new managed care policies.* 
In some States,  continued  pressures  on the fee-for-service  staffs appear  to sustain  a 
separation  between  fee-for-service  and managed  care  staffs.  One agency  manager  noted 
that those pressures  prevent  the agency  from  shifting  staff as it would like  and make it 
hard for the agency  to come together.  In other  States,  the agencies  have developed 
explicit  policies  of gradually  incorporating  some managed  care responsibilities  into the 
work  of fee-for-service  staff.  A manager  in an agency  that has taken this approach  said 
that it has enabled  more  staff to be supervised  by some in their  own discipline  and,  as 
such,  has lead to a greater  overall  commitment  to managed  care. 
b In many of the agencies,  the move toward major staff redeployment  is imminent. 
Both internally  and externally,  pressures toward this end are mounting. 
One agency  director  said:  We are now at the point  of making  decisions  of where  to drop 
off fee-for-service  pieces.   Agency  managers  in other  States made the same point.  In a 
number  of States,  the fee-for-service  claims  volume  has just  recently  begun  to decline. 
This  suggests some freeing  up of fee-for-service  staff.  In some States,  most especially 
California,  legislatures  are becoming  increasingly  aware of this development  and 
10  beginning  to look  for associated 
budget  savings,*  Pressing  for Administrative  Savings 
In one traditional  fee-for-service  In reviewing  the Governors  Medicaid  budget  for Fiscal  Year 
96/97  budget,  the California  Legislative  Analysts  Office 
sphere--surveillance  and 
recommended  eliminating  48 field  office  positions  and 
utilization  review  (SURS)--the 
reducing  the claims  processing  contract.  These  actions,  it 
momentum  toward  staff  held,  could  save $3.3  million,  and were justified  because 
redeployment  appears  to be  managed  care expansion  was contributing  to a dectining  fee-
for-service  workload. 
gaining  particular  strength.  In a 
number  of the agencies,  many 
The Governors  Office  successfully  maintained  that such 
SURS staff have been refocusing 
reductions  were  premature  for that year.  However,  in its 
on quality  improvement 
Fiscal  Year  97198 budget,  it has proposed  a reduction  of $3.1 
functions  as opposed  to the  million  and 60 positions  in Medicaid  prior  authorization  staff 
traditional  fraud and abuse  because  of the advance  of managed  care. 
investigations.  In some cases 
this has entailed  transfers  to new 
organizational  units;  in others,  a realignment  within  existing  units. 
Challenge  #5:  Avoiding  a Fee-For-Service  Meltdown 
In the shadow of managed  care,  fee-for-service  often becomes  viewed  as the residual 
sector responsible  for an outmoded  product  line.  Yet, even into  Stage III,  it is likely  to 
account  for a majority  of Medicaid  expenditures  and staff.  Medicaid  agencies  must find 
ways of maintaining  the effectiveness  of this product  line as they diminish  its scope and 
continue  to expand  managed  care. 
One Medicaid  agency  manager  framed  the challenge  well by asking  these questions: 
How do you  manage  two systems concurrently ?  You have people  on both ends and 
people  floating  in the middle.  How do you get people  to change  and get people  who 
understand  and have  skills  for both  systems?** 
b Less innovation.  Lower morale.  Slower responses.  These and other danger signs 
are becoming  increasingly  apparent  in the fee-for-service  sector of the agencies. 
Managers  in most of the agencies  we contacted  indicated  that the heightened  attention 
being  given  to full-risk  managed  care was having  some dysfunctional  consequences  on 
traditional  fee-for-service  operations.  Although  they did not see these consequences  of 
great  concern  at this point,  they believed  that they could intensify  as the move toward 
managed  care accelerated.  They  indicated  that the undesirable  effects  tend to be subtle 
and gradual,  stemming  from reduced  program  innovation  and initiative  on the fee-for-
service  side.  Particularly  common  is reduced  access to agency  programming  staff,  who 
tend to be focused  on managed  care efforts  and less available  to help with efforts  such as 
the development  of new payment  methodologies  for various  fee-for-service  functions. 
This  situation,  as one manager  noted,  could  well require  a greater  tolerance  for errors  in 
the fee-for-service  sector.  For instance,  reduced provider  education  efforts  by provider 
11  relations  staff could  (and some say do) contribute  to a higher  rate of erroneous  provider 
claims  which  end up being  denied. 
In table 3, we address  the effects  of managed  care on six selected  fee-for-service 
functions.  Our observations  focus on the big picture  that emerges  when considering  the 
10 States we reviewed.  In various  ways and to varying  degrees,  of course,  each States 
own situation  varies  from  the synthesis  observations  we offer. 
TABLE 3 

EFFECT OF MANAGED CARE ON TRADITIONAL FEEFOR-SERVICE  FUNCTIONS 

Function  Extent  of  Nature  of Effect 
Effect 
Third  Party  Moderate  to  TPL  role typically  passed  on to health  plans.  Leading  to reduction  in 
Liability  (TPL)  Substantial  State agency  TPL  staffs and  loss of agency  expertise.  Widespread 
concerns  that health  plan  dollar  recovery  results  will  be less than  those 
achieved  by the agency. 
Surveillance  and  Moderate  to  Reductions  in SURS  exceptions  and  fee-for-service  SURS  staff. 
Utilization  Substantial.  Refocusing  on quality  measurement  and  targeted  studies.  Decreased 
Review  Systems  support  for fee-for-service  investigations.  Little  staff experience  with 
ww  managed  care  investigations. 
Drug  Utilization  Moderate  to  Most  States give  DUR  role to health  plans.  DUR  staff have  little 
Review  (DUR)  Substantial.  connection  with  agency  managed  care  staffs or with  health  plan  DUR 
efforts.  Most  prescription  drug  expenditures  still accounted  for by aged 
and  disabled  fee-for-service  population. 
Provider  Moderate.  Transition  process  triggers  increase  in inquiries.  Signs  in some States 
Relations  of dysfunctional  effects  such as longer  response  times,  less attention  to 
proactive  provider  education,  and even  an undermining  of staff service 
ethic. 
Claims  Moderate.  Programming  changes  to accommodate  managed  care  enrollments, 
Processing  payments,  and  encounter  data.  Five  to 10 percent  reduction  in claims 
volume  in some  States.  Some  slippage  in fee-for-service  housekeeping 
tasks,  such as correcting  errors. 
Prior  Minor.  Minimal  signs  of drop-off  in workload  as aged,  blind,  and  disabled 
Authorization  cases continue  to sustain  prior  authorization  efforts.  But in a few States 
discussions  already  beginning  about  how to plan  for substantial  staffing 
reductions  in next 2 to 3 years. 
Our review  reveals  that the danger  signs are particularly  notable  for three  traditional  fee-
for-service  functions.  The first,  and perhaps  most pressing  danger  involves,  the 
delegation  of third-party-liability  (TPL) responsibilities  to the health  plans.23  These 
responsibilities  involve  identifying  and obtaining  payments  from any other  sources  of 
insurance  or coverage  held by Medicaid  beneficiaries.  This  is a process  in which  many 
Medicaid  agencies  have become  quite adept and have used to achieve  significant 
savings.%  Most health  plans,  in contrast,  have little  experience  with TPL  tracking  and 
recovery  techniques.  As long as prior  fee-for-service  TPL  savings  are reflected  in 
capitated  rates,  the potential  financial  risks to Medicaid  are contained.  The enduring 
12 
 challenge  will be to ensure  that capitated  arrangements  do not erode  the incentives  and 
expertise  needed  to maximize  TPL recoveries.25 
The  second concern  centers  around  signs of a diminishing  focus on fraud and abuse 
investigations  in the fee-for-service  sector at a time when that sector is still the dominant 
one in the great  majority  of State Medicaid  agencies.  This  concern  is reinforced  by a 
recent  Office  of Inspector  General  report  documenting  a decline  in the number  of 
suspected  fraud  referrals  to State Medicaid  Fraud  Control  Units.26  As important  as it is 
to gear up to handle  the new oversight  responsibilities  associated  with  managed  care,  a 
reduced  scrutiny  at this point  on the fee-for-service  side would  seem to be an unacceptable 
price. 
Finally,  delegating  DUR responsibilities  to health  plans raises concerns  about  how fully 
DUR programs  are being  used to oversee  the adequacy  of drug therapy  regimes  of 
Medicaid  managed  care enrollees.  In accord  with the requirements  of the Omnibus 
Budget Reconciliation  Act of  1990, State Medicaid  agencies  have developed  DUR 
programs  geared  to their  fee-for-service  beneficiaries.27  But, as we stressed  in a prior 
report  addressing  the lessons  learned  by those programs,  the infrastructure  and insights 
they developed  become  increasingly  irrelevant  as beneficiaries  are enrolled  in health 
plan~.*~ Thus  far,  the agencies  report  that they have little  information  about the thrust or 
effects  of the plans  own DUR efforts.  Adding  to our sense of concern  are findings  in 
one of our more recent  reports  that most health plans contract  with pharmaceutical  benefit 
management  companies  to manage their prescription  drug benefits  and conduct  only 
minimal  oversight  of the performance  of these firms.29 
These  concerns,  we emphasize,  are put forth  as danger  signs - as early  alerts  to what 
could  emerge  as significant  problems  if not adequately  addressed.  At the same time,  we 
recognize  that with proper  guidance  fee-for-service  management  can actually  be 
strengthened  as managed  care expands.  To some degree,  this may in fact be happening  in 
some States,  especially  those with large PCCM  programs.30 
F Notwithstanding  the  danger  signs,  the  fee-for-service  sector  of Medicaid  agencies  is 
not  moribund.  Within  it are  some  creative  st.irrings  that  could  contribute 
significantly  to reinvigorat.ed  Medicaid  agencies  in the  years  ahead. 
Particularly  promising  are those initiatives  that seek to introduce  a value purchasing 
approach  to that sector.  The Ohio agency,  for example,  has engaged  in selective 
contracting  for home and community  based services  and has negotiated  a contract  with a 
single provider  for vision  care services.  Other agencies  have taken  similar  approaches, 
which  represent  a significant  contrast  from the traditional  bill-payer  orientation  of 
Medicaid  agencies,  but yet are not capitated  managed care. 
Many  agencies  are also actively  involved  in managing  the care of certain  high-cost 
beneficiaries  who continue  to be served within  the fee-for-service  sector.  For  instance, 
the California  agency  has been carrying  out a medical  case management  program  directed 
to patients  who have had multiple  hospital  admissions  and/or  complex  treatments.  Under 
13  the program,  agency  nurses work with the providers  and patients  to facilitate  care in home 
settings  and to avert  preventable  hospital  readmissions.  For Fiscal  Year  1994-95, the 
agency  documented  savings  of $11.2  million  for 2,349  cases.3  The State legislature  was 
impressed  enough  to authorize  funding  for 46 new positions  to support  the program;  this 
at a time when the agencys  capitated  managed  care program  was moving  full  speed 
ahead. 
Finally,  within  individual  fee-for-service  sectors,  one can find some efforts  to minimize 
the adverse  effects  associated  with downsizing.  Striking  in this regard  is the Oregon 
agencys  initiative  in using prisoners  to respond  to basic  telephone  inquiries  by providers 
and beneficiaries.  Facilitated  by a Statewide  referendum  that called  for prisoners  to be 
engaged  in training  or employment,  this initiative  has enabled  a downsized  provider 
relations  staff to focus on more complex  inquiries  and to reduce  its backlog  of billing 
exceptions. 
14 
 RETOOLING  AS  AN  ISSUE 
Retooling  of Medicaid  agencies  for  managed  care  has  been  a low  priority  issue. 
This  has been true for Medicaid  agencies  leadership,  the State legislatures,  and the Health 
Care Financing  Administration  of the U.S.  Department  of Health  and Human  Services.  In 
each of these settings,  the focus of those concerned  with managed  care  is on the substance 
of the effort  as it affects providers,  beneficiaries,  and taxpayers.  In the States we 
reviewed,  even in those where  managed  care is well advanced,  the emphasis  on program 
design  and implementation  has been nearly  all encompassing.  Further,  although  important 
work has been done in developing  conceptual  frameworks,  overall  missions,  and long-
term plans,  agency  managers  find themselves  compelled  to concentrate  on near-term 
actions,  often  in a reactive  rather  than proactive  mode.  Long-term  around  here,  said 
one agency  manager,  is about 2 months. 
In this environment,  agency  leadership  from  time to time has given  substantial  attention  to 
reorganizations  intended  to position  the agency  more effectively  for the transition  to 
managed  care.  But the thorny  particulars  of reorienting,  retraining,  and redeploying  staff 
for new roles  typically  have remained  on the backburner.  And State legislatures  to this 
point  have expressed  little  interest  in these particulars. 
The Health  Care Financing  Administration  (HCFA)  has indicated  some concern  about 
these administrative  issues.  Its Medicaid  monitoring  guide for regional  office  officials 
raises  some general  questions  that bear on the Medicaid  agencys  organizational  readiness 
to carry  out a managed  care program.  More  notably,  in its guide intended  to help HCFA 
reviewers  assess the readiness  of States to carry  out Section  1115 waivers,  it has a section 
on State administration  that poses  some pertinent  retooling  questions  to address.  It asks 
for instance:  . .what problems  does the State foresee  in running  two parallel  Medicaid 
programs?  How will  the two programs  be coordinated?  It also asks:  Have key  staff 
been hired  and trained.. . .?I 
These  and a few other  such questions  posed by HCFA  address  important  issues concerning 
how Medicaid  agencies  equip their  organizations.  At times,  they  have led to 
communications  with State officials  about the adequacy  of administrative  resources  being 
devoted  in support  of managed care efforts.  But they typically  are overshadowed  by 
hundreds  of other  questions  and communications  focusing  on the programmatic  content 
and processes  of managed  care. 
15 
 RECOMMENDATIONS 
Our review  indicates  that during  Stage I and even well into  Stage II,  State Medicaid 
agencies  have not found it necessary  to give major  attention  to the retooling  challenges 
addressed  in this report.  In part,  this is because  the agencies  managed  care initiatives 
have not yet had a substantial  effect  on their  fee-for-service  operations  and staff.  It is also 
because  they  have been able to assemble  a core of talented  staff who have been  fast 
learners  and have assumed the lions  share of design and early  implementation 
responsibilities.  Some of the agencies  have been more aggressive  than others  in tackling 
and anticipating  the internal  organizational  changes  that will be necessary  as they increase 
their  commitment  to managed care,  but even in these cases,  the efforts  are  more 
appropriately  characterized  as backburner  rather  than frontburner  matters. 
As Medicaid  agencies  approach  and enter  Stage III,  this situation  will  have to change.  As 
the decline  in fee-for-service  workloads  accelerates,  agency  managers  will be compelled  to 
give high priority  to how they redeploy  most of their  workforce  into very  different  roles, 
orient  them to a new mission,  train  them to develop  new skills,  and at the same time make 
certain  that remaining  fee-for-service  operations  continue  to perform  adequately.  In the 
midst of all this,  some,  and perhaps  most,  of the agencies  will also have to engage  in 
significant  downsizing  of their  staffs.  A transformed  agency  focused  on full-risk  managed 
care and prudent  purchasing  typically  will  not require  the staffing  levels  of traditional 
Medicaid  agencies. 
This  transition  presents  major  opportunities,  The inevitable  disruption  provides 
management  with a chance  to reengineer  their  agencies  in ways that enhance  their  overall 
productivity.  In fact, given  the scope of the internal  changes  necessary,  Medicaid 
agencies  could  well serve as pioneers  for workforce  reforms  for all of State government. 
Moving  in this direction,  however,  will call for substantial  support  from both  State 
governors  and State legislatures.  In particular,  they would  have to be willing  to allow  for 
and even  urge changes  in State civil  service  systems that now impede  agency  efforts  to 
make most effective  use of their  human  resources. 
At the same time,  the transition  presents  major dangers,  particularly  if the agencies  are 
not adequately  prepared  for them,  In the fee-for-service  sector,  lower  levels  of priority, 
innovation,  and morale  could erode  service  to beneficiaries  and providers  still dependent 
on that sector,  and could  weaken important  oversight  activities.  In the expanded  managed 
care  sector,  poor  staff training,  motivation,  and organization  could  undermine  the 
transition  to capitated  health  care arrangements  that State government  is counting  heavily 
upon to help contain  Medicaid  costs and improve  the beneficiaries  access  to good quality 
services. 
The lead role here  is that of the States.  But given  the partnership  nature  of the Medicaid 
program,  the Federal  government  and State governments  should  work cooperatively  in 
16 
 finding  effective  ways of dealing  with these challenges.  Toward  that end,  we direct  the 
following  recommendations  to the Health  Care Financing  Administration: 
The  HCFA  should  provide  forums  to help  State  Medicaid  managers  take  advantage  of 
the  opportunities  managed  care  presents  for  retooling  their  agencies  and  to minimize 
the  associated  dangers. 
These  forums  could  be convened  at the national  level,  through  the establishment  of a work 

group  or technical  advisory  group,  as well as at regional  levels,  through  the efforts  of 

regional  offices.  State environments  are too varied  to expect  that the development  of a set 

of explicit  national  guidelines  would be feasible.  However,  written  analyses  and 

discussions  of lessons  learned  and promising  approaches  identified  by State officials 

themselves  could be quite  useful.  It could be particularly  useful to tap into the 

experiences  of those States where  Medicaid  managed  care penetration  is well advanced. 

This  kind  of activity  is especially  important  in view of our finding  that State officials 

rarely  get to attend conferences  to become  exposed to lessons  learned  by other  States in 

moving  from  fee-for-service  to managed care environments. 

The  HCFA  should  revise  its review  and  monitoring  protocols  so that  they  devote 
greater  attention  to how  State  Medicaid  agencies  are  handling  the  organizational 
challenges  associated  with  expanded  managed  care. 
These  issues are too complex  and too rooted  in the distinctive  characteristics  of State 
political  and organizational  cultures  to be conducive  to checkmark  certifications  by federal 
reviewers.  But in the course  of its efforts  to monitor  State agency  managed  care 
initiatives,  to review  Section  1915 and  1115 waiver  requests,  and,  most especially,  to 
evaluate  Section  1115 research  and demonstration  projects,  HCFA  (and its contractors) 
should  incorporate  greater  discussion,  inquiry,  and assessment  of retooling  issues into its 
reviews.  For agencies  approaching  and into  Stage II, these reviews  should  devote 
particular  emphasis  to agency  plans and activities  involving  the redeployment  of fee-for-
service  staff.  At the least,  this process  could  help generate  more attention  to these issues 
at the State level.  Beyond  that,  it could well yield  insights  that are helpful  to State agency 
managers. 
The  HCFA,  in  its ongoing  reviews  of State  Medicaid  agencies,  should  scrutinize 
possible  adverse  effects  of managed  care  expansion  on  the  performance  of established 
fee-for-service  funct,ions. 
In these reviews,  HCFA  should give  special attention  to possible  danger  signs we noted 
concerning  third-party-liability,  surveillance  and utilization  review  subsystems,  and drug 
utilization  review. 
With  respect  to third-party-liability  (TPL),  HCFA  has been well aware  of the dangers  that 
we note.  For  some time it has been working  with State representatives  and the American 
Public  Welfare  Association  through  a technical  assistance  group addressing  the dangers 
17  and how to address  them.  Most recently,  these efforts  have led to (1) the design  and 
distribution  of a survey  to obtain  up-to-date  information  on how States are handling  TPL 
for beneficiaries  in managed  care,  (2) the restructuring  of State data reporting 
requirements  to ensure  that States report  to HCFA  third-party  collections  made by health 
plans,  and (3) joint  agreement  that the American  Public  Welfare  Association  will prepare 
for the State Medicaid  agencies  a technical  assistance  piece  that will  offer  guidance  on 
how to incorporate  TPL responsibilities  in contracts  with health  plans.32  These  are 
constructive  initiatives.  Our recommendation  is intended  to reinforce  their  significance 
and to encourage  State Medicaid  agency  leadership  to be fully  alert  to the most cost-
effective  ways of pursuing  third-party-liability  in managed  care environments. 
In regard  to surveillance  and utilization  review  subsystems  (SURS), HCFAs  Program 
Integrity  Group  has been undertaking  initiatives  that could help improve  the effectiveness 
of State SURS units.33  In response  to the recent  OIG report  on these units,  for instance, 
HCFA  noted  that it plans  for these units to be users of its recently  developed  fraud 
investigation  database.  However,  the intent  of this initiative  would be undermined  if the 
remaining  fee-for-service  SURS units in the States lack sufficient  staff resources  or 
expertise  to take full advantage  of this database.  This  matter  may warrant  some attention 
by the Program  Integrity  Group. 
For drug utilization  review,  finally,  State Medicaid  agencies  and HCFA  look  to the 
collection  and analysis  of encounter  data from plans as a way of overseeing  their 
performance  on drug management  issues and minimizing  the kind of danger  we note in 
this report.  However,  with  such efforts  being in their very  early  stages,  additional 
measures  could be warranted,  In that context,  HCFA  could  work  with the Medicaid 
agencies  to identify  ways of using the health  plan contract  as a vehicle  for holding  plans 
more  fully  accountable  for how they manage drug therapies.  These  could  involve  the 
incorporation  into the contracts  of:  (1) performance  measures  concerning  prescription 
drugs that are set forth  in the Health  Plan  Employer  Data Information  Set developed  by 
the National  Committee  for Quality  Assurance  and (2) specific  assurances  that plans would 
obtain  in their  subcontracts  with PBMs. 34 It could also involve,  as we have noted  in a 
previous  report,  increased  State review  of pharmacy  practice  in its on-site  monitoring  of 
the plans. 
18 
 COMMENTS  ON  THE  DRAFT  REPORT 
We solicited  and received  comments  on the draft report  from  the Health  Care Financing 
Administration,  the Acting  Assistant  Secretary  for Health  (ASH), and the Assistant 
Secretary  for Planning  and Evaluation  (ASPE).  The  ASPE concurred  without  elaboration. 
The HCFA  and ASH comments  appear  in full in appendix  B.  Below we summarize  them 
and offer  our response  in italics. 
The HCFA  concurred  with our first two recommendations.  It reinforced  the importance 
of using existing  mechanisms  to help States learn  from one another  as they  move  from 
fee-for-service  to managed  care arrangements.  It also agreed  with the importance  of 
reviewing  and revising  HCFA  monitoring  protocols  so that they are sufficiently  sensitive 
to the organizational  challenges  associated  with expanded  managed  care. 
With  respect  to our third  recommendation  calling  for the State Medicaid  agencies  to 
scrutinize  possible  adverse  effects  of managed care expansion  on the performance  of 
established  fee-for-service  functions,  HCFA  offered  a partial  concurrence.  It noted  that 
actions  taken  in response  to the first two recommendations  could  alleviate  the need for 
such scrutiny  and that HCFA,  as our report  indicates,  is already  doing  a good deal to 
monitor  possible  adverse  effects. 
In line  with the above comment,  HCFA  suggested that our reference  to danger  signs in 
the fee-for-service  sector be changed  to concerns.  It also suggested  that the States 
discussed  in the report  be given  the opportunity  to comment  on it. 
We considered  HCFA s suggestion on characterizing  the possible  problems  in the fee-for-
service  sector  as  concerns  rather than  danger signs.   We decided  to retain the latter 
term because  it more  accurately  reflected  what  we heard  and observed  in the study States. 
At the same  time, as we note in the report,  we present  the danger  signs as early  alerts 
that could emerge  as significant problems  if not adequately  addressed. 
Concerning HCFAs other comment about obtaining feedback  from  the States reviewed,  we 
have  received  considerable  comment  from  them  during the course  of framing  ourflndings 
and recommendations.  We are distributing the report widely among the States,  and,  as is 
our custom, will include with it a user feedback  form  inviting&rther  comment. 
Finally,  the Acting  Assistant  Secretary  of Health  did not comment  on specific  findings  or 
recommendations  in the report,  but did offer  four suggestions  intended  to enhance  the 
transition  process  to Medicaid  managed care.  They  are helpful  suggestions  that warrant 
consideration  by the States and HCFA.  They  concern  the involvement  of the State health 
departments  in the managed  care process,  the need for broad  stakeholder  involvement  in 
the process,  the need to strengthen  the integration  of public  health  concerns  into  the 
change process,  and the importance  of strengthening  compliance,  monitoring,  and 
evaluation  at the State level. 
19  APPENDIX  A 

BACKGROUND  ONMEDICAID  MANAGED  CARE 
Medicaid  Expansion  into Managed  Care Programs 
Over  the past  15 years,  States have increasingly  used managed  care to provide 
medical  services  for Medicaid  beneficiaries.  This  trend has accelerated  in the past few 
years:  in  1991, 2.7  million  Medicaid  beneficiaries  were enrolled  in managed  care,  by 
1993, that number  grew to 4.8  million,  and in  1996,  13 million.  As of June  1996, 
39 percent  of all Medicaid  beneficiaries  were enrolled  in some kind  of managed  care 
arrangement. 
To date,  States have primarily  enrolled  adults and children  in low-income  families 
into  managed  care,  whereas  aged or disabled  beneficiaries  remain  under  fee-for-service 
systems.  By  1996, over 500 managed  care organizations  were providing  services  to  13 
million  Medicaid  beneficiaries. 
The  movement  to enroll  Medicaid  beneficiaries  in managed  care began in earnest 
in the early  1980s  as States experienced  significant  fiscal pressures  due to rising  Medicaid 
costs.  While  States viewed  managed  care as a way to contain  Medicaid  costs,  they  were 
constrained  by Federal  standards  required  for Medicaid  enrollment  in managed  care. 
In response  to mounting  concerns,  Congress  allowed  States greater  flexibility  to 
deviate  from  those  standards  through  amendments  to the  1981 Omnibus  Budget 
Reconciliation  Act.35 For example,  the amendments  allow  States to pursue  freedom-of-
choice  waivers  (under  section  1915 of the Social  Security  Act) that release  them from 
certain  Federal  provisions,  such as the free-choice-of-provider  provision.  To date,  42 
States have  freedom-of-choice  waivers. 
States also can receive  research  and demonstration  waivers  under  section 
1115 of the Social  Security  Act.  Since  1992, many States have aggressively  pursued  such 
waivers.  States implementing  or pursuing  1115 waivers  often extend,  as a part of their 
demonstration,  insurance  benefits  to those not otherwise  eligible  for Medicaid,  such as the 
working  poor  and their  families.  As of this writing,  HCFA  has approved 
18 research  and demonstration  waivers.  Of those,  12 States have implemented  their 
programs,  5 are pending  implementation,  and one has no plans  to implement.36  The 
HCFA  is currently  reviewing  nine States applications.37 
A-l  Defining Managed  Care 
Although  managed  care organizations  vary,  they generally  feature  a focus on 
primary,  preventive  health  care and care coordination.  That  focus is believed  to improve 
care and access for enrollees.  It is also thought  to promote  cost containment,  thus slowing 
the rate  of increase  in health  care  spending. 
The managed  care organizations  enrolling  Medicaid  beneficiaries  can generally  be 
defined  as fitting  into  one of two basic types:  health  maintenance  organizations  and fee-
for-service  primary  care case management  (PCCM) programs.  Both types feature 
coordinated  care.  But each carries  a different  level  of financial  risk.  Health  maintenance 
organizations  (hereafter  referred  to as health  plans or plans)  are full-risk  plans  that 
contract  with Medicaid  for a fixed fee per person  and provide  comprehensive  services.38 
PCCM  programs  comprise  providers,  usually  primary  care physicians,  willing  to serve as 
gatekeepers  and take responsibility  for approving  and coordinating  enrollees  care. 
Medicaid  pays PCCM  providers  on a fee-for-service  basis,  but they receive  a case 
management  fee to cover  their added responsibilities.  Thus PCCM providers  are at no 
financial  risk. 
Some agencies  also contract  with plans  separately  for certain  aspects  of care,  such 
as mental  health,  substance  abuse,  and dental  care.  The arrangements  for these  carve-
outs vary  in terms of the services  included  and the level  of financial  risk  the plan 
assumes. 
A-2 
 APPENDIX  B 
COMPLETECOMMENTSON  DRAFTREPORT 
In this appendix,  we present  in full the comments  of the Health  Care Financing 
Administration  and the Acting  Assistant  Secretary  for Health. 
B- 1 
 APPENDIX  C 

ENDNOTES 

1.  See,  for examples,  General  Accounting  Office,  Medicaid:  Data  Improvements Needed 
to Help Manage  Health  Care Program  , (IMTEC-93-18),  May  1993; General  Accounting 
Office,  Medicaid:  Ekperience  with State Waivers to Promote  Cost Control and Access  to 
Care,  (T-HEHS-95-115),  March  1995; Kaiser  Commission  on the Future  of Medicaid, 
Medicaid  and Managed  Care:  Lessonsfiom  the Literature,  Washington,  DC,  March  1995. 
John  K. Iglehart,  Health Policy  Report:  Medicaid  and Managed  Care,  New England 
Journal  of Medicine  (322) 25, June 22,  1995,  1727-1731; Joel Schendler,  Implementing 
a Managed-Care  System in a Fee-for-Service  Environment,  W Memo,  ~01.7, no.7,  July 
1995, pp. 29-31;  Physician  Payment  Review  Commission,  Annual Report to Congress, 
1995;  General  Accounting  Office,  Medicaid  Managed  Care:  More  Competition  and 
Oversight  Would  Improve  Californias  Expansion  Plan,  (HEHS-95-87),  April  1995; 
National  Academy  for State Health  Policy,  Medicaid  Managed  Care:  A Guide for  States, 
Portland,  Maine,  1995; and  Michael  S. Sparer,  Medicaid  Reform  and the Limits of  State 
Health Reform,  (Philadelphia:  Temple  University  Press,  1996. 
2.  In this report,  we use the term  organizational  challenges  in reference  to those 
internal  issues affecting  the productivity  of the agency.  They  center  around  how agency 
management  relates  to agency  staff and defines  their  missions,  roles,  and tasks.  These 
challenges  are of course  related  to, but yet distinct  from  those focusing  on the design, 
implementation,  and assessment  of managed care efforts. 
3.  The National  Academy  for State Health  Policy  has given  some attention  to these 
challenges.  See its chapter  on administrative  issues in Medicaid  Managed  Care  Guide: A 
Guide for  States. 
4.  Donna  Checkett,  A State Medicaid  Director  on Medicaid  Managed  Care,  Health 
Afiirs  15 (3), Fall  1996,  172. 
5. 	 The States are California,  Florida,  Ohio,  Massachusetts,  Minnesota,  Missouri,  New 
York,  Oregon,  Rhode  Island,  and Utah.  Our in-depth  visits were to California, 
Minnesota,  and Massachusetts. 
6.  Nowhere,  it seems,  has Medicaid  managed care been ushered  in more quickly  than in 
Tennessee.  See G. Girden Bonnyman,  Jr.,  Stealth Reform:  Market-Based  Medicaid  in 
Tennessee,  Health Amirs  15 (2) Summer  1996, 306-14;  Jim Cooper  (former 
congressman),  TennCare:  Tennessees  Medicaid  Experiment,  Letter  to the Editor  in 
Health Amirs  15 (4), 282; and David  M.  Mirvis,  et al.,  TennCare--Health  System 
C-l 
 Reform  for Tennessee,  Journal  of the American Medical Association,  (274)  15, October 
18, 1995,  1235-1241. 
7. 	 In an extended  discussion,  Medicine and Health  reports  on four basic  stages of health 
care market  development  as delineated  by the American  Practice  Association.  See 
Christina  Kent,  editor,  Perspectives,  Medicine and Health,  April  17, 1995,  l-4. 
8.  California,  for instance,  has undertaken  some major  Medicaid  managed  care efforts  in 
the early  1970s.  They  turned out to be largely  unsuccessful,  but provided  a body  of 
lessons  learned  experience  to draw upon in framing  the more recent  initiatives.  See 
Sparer,  Medicaid  and the Limits of State Health Reform. 
9.  The  California  Medicaid  program  covers  about 5.5  million  enrollees.  In contrast,  the 
Rhode  Island  program  covers  a little  more than  100,000.  Clearly,  the dimensions  of the 
retooling  challenges  are very  different  in these two settings. 
10.  The complexity  is greatly  influenced  by factors  such as the number  and type of carve-
outs;  the number  and scope of relationships  with other  State agencies,  with county 
governments,  and with local  service providers  (such as community  health  centers);  and the 
number  of linguistic  groups being  served  (about 40 in California) 
11.  In particular,  these would involve  State health  departments  and State departments 
responsible  for licensure  of insurance  entities. 
12.  Given  that our categories  are general  and that the pace of change  in the States is 
often  quite fast,  any assignment  of individual  States to particular  Stages,  as we have done, 
can be risky.  Perhaps  the most difficult  assignment  in this regard  is Massachusetts.  At 
this writing,  PCCM  remains  as the dominant  mode of managed  care in Massachusetts. 
However,  the Medicaid  agency  has a substantial  number  of disabled  enrolled  in PCCM 
arrangements  and the agency  leadership  has infused  throughout  much of the agency  a 
purchaser  orientation  much like that we describe  for Stage II or III States. 
13.  Our typology  of five challenges  omits one that might normally  be regarded  as one of 
the most prominent:  the adequacy  of staffing  levels  to carry  out managed  care 
responsibilities.  In our presentation,  that challenge  is to some degree  subsumed  under 
some of the others,  which  we found  more compelling.  For instance,  the challenges  of 
establishing  a core  team and acquiring  the necessary  knowledge  and skills clearly  involve 
obtaining  adequate  numbers  of staff. 
None  of this is meant to minimize  the danger  of managed  care initiatives  being 
jeopardized  by having  too few staff associated  with their  implementation.  Indeed,  in a 
recent  review  of five  Section  1115 Medicaid  managed  care demonstration  projects,  the 
authors  offer  the following  warning:  New programs  need to have enough  administrative 
resources.   They  add:  At least in the short term,  states may require  more 
administrative  capacity,  particularly  if they are continuing  to use fee-for-service  for  some 
populations  or services.   See Mathematics  Policy  research,  Inc.  and the Urban  Institute, 
Implementing State Health  Care Reform:  What Have  We Learned  From  The First Year? 
c-2  The First Biannual Report of the Evaluation  of Health Reform  in Five States.  Submitted 
to Office  of research  and Demonstrations,  Health  Care Financing  Administration, 
December  18, 1996. 
14.  In Florida,  responsibility  for managed  care is split between  two offices.  The full-risk 
component  is led out of the Bureau of Managed  Care in the Division  of Quality 
Assurance.  The PCCM  initiative  is run out of the fee-for-service  operation  in the 
Division  of State Health  Purchasing. 
15.  Of course,  this complaint  is not unique to managers  in the Medicaid  agency. 
Mangers  in other  State and Federal  agencies  regularly  express  similar  concerns  about  the 
lack of flexibility  afforded  by personnel  systems.  But for an agency  seeking  to introduce 
a fundamental  shift in its mission  and operations,  such inflexibility  can present  particularly 
serious problems. 
16.  Although  perhaps  a bit dramatically,  one agency  manager  conveyed  the seriousness  of 
the situation  as viewed  by many  Medicaid  program  staff:  Change  is coming  too fast to 
adjust employee  perceptions.  Its like  stages of death.  Its like a corporate  merger.  Its a 
rough  transition.  Its like  mourning  for a loss. 
17.  In Massachusetts,  consultants  from  the University  of Massachusetts  interviewed  staff 
and conducted  focus groups  involving  staff,  The effort  identified  some communication 
problems  within  the agency  and led to a series of initiatives  addressing  them.  These 
included  an agencywide  newsletter,  regular  off-site  meetings  with senior  staff to discuss 
benefit  plan progress,  a survey  of training  needs,  and some field reorganization. 
18.  In Missouri,  after  interviewing  about 75 agency  staff,  a consultant  developed  a four-
phase process  to prepare  the agency  for the internal  changes  necessary  to carry  out 
expanded  managed  care responsibilities.  It involved  two retreats  as well as consultant-
facilitated  task groups  and technical  assistance  to help agency  management  and staff 
make the necessary  adjustments  to the new structures  and systems.  . .  
19.  As the State Medicaid  agency  that has gone the furthest  in transforming  itself  from 
fee-for-service  a managed  care,  the Oregon  agency  has a substantial  body  of experience  to 
draw upon in further  explaining  the challenges  of retooling  and understanding  the lessons 
learned  in responding  to them.  Unfortunately,  in our inquiry,  our contacts  with Oregon 
officials  did not involve  a site visit and were limited  to brief  telephone  conversations;  so 
in this report  we are unable draw  substantially  on the Oregon  experience.  It does,  we 
believe,  warrant  further  examination,  in the context  of the issues raised  in this report. 
Of course,  there  is a substantial  literature  on Oregons  Medicaid  reforms.  See,  for 
examples,  Mathematics  Policy  Research  (for the Kaiser  Foundation  and Commonwealth 
Fund),  Managed  Care and Low-Income  Populations:  A Case Study of Managed  Care in 
Oregon,  July  1995; and John  A. Kitzhaber,  The Governor  of Oregon  on Medicaid 
Managed  Care,  Health Aflairs  (15) 3, Fall  1996,  167-69. 
c-3  20. 	 This  was a particular  problem  for the Oregon  agency  when,  in  1994, it was 
substantially  expanding  the number  of individuals  served by the Medicaid  program.  The 
fee-for-service  provider  relations  staff found  itself faced with  significant  increases  in 
telephone  inquiries  and billing  exceptions.  Before long a substantial  backlog  developed 
which  added to frustrations. 
21.  A politically  sensitive  point  not usually  emphasized  by the architects  of managed  care 
reforms  is that for a time dual managed  care/fee-for-service  systems  will  actually  be more 
expensive  to administer  than traditional  fee-for-service  systems.  It is not until  sizeable 
decreases  occur  in fee-for-service  claims  volume  that significant  opportunities  for 
administrative  savings  are likely  to emerge. 
22.  In those agencies  that are increasingly  oriented  toward a prudent  purchasing 
perspective  and explain  their  mission  in those terms  (as does the Ohio  agency),  the 
distinctions  between  fee-for-service  and managed care  may become  increasingly  blurred. 
According  to former  HCFA  Administrator  Bruce Vladeck  and health  care consultant  Lynn 
Etheredge,  this,  in fact,  is happening  in health  care  markets  across  the country.  See 
Robert  Cunningham,  editor,  Perspectives:  Government  as Purchaser:  Making  Policy  by 
Contract,  Medicine  and Health,  October  14, 1996,  l-4. 
23.  Consultants  hired  by State Medicaid  agencies  often recommend  that TPL be delegated 
to health  plans  to simplify  administration  for the agency.  As long as the capitated  rate 
reflects  prior  levels  of TPL recovery  on the fee-for-service  side,  this delegation  tends to 
be attractive  to the Medicaid  agencies. 
24. 	 A California  Medicaid  official  has estimated  that without TPL  savings,  Californias 
Medicaid  costs would be over 20 percent  higher.   See Barbara  V. Carr,  Who Manages 
Third  Party  Liability  when a State Contracts  its Medicaid  Program  to Managed  Care 
Plans,  March  1995. 
25. 	 See Jane Horvath,  Third  Party  Liability  in Risk-Based  Managed  Care:  Issues and 
Options,  in National  Academy  for State Health  Policy,  Medicaid  Managed  Care:  A 
Guide for  States,  1995, 111-65-81. 
26.  Office  of Inspector  General,  Office of Evaluation  and Inspections,  Surveillance  and 
Utilization  Review  Subsystems  Case Referrals  to Medicaid  Fraud  Control  Units,  (OEI-
07-95-00030),  November  1996. 
27.  The legislation  exempted  health  plans contracting  with Medicaid  agencies  from  the 
requirements  of the DUR program  it set forth. 
28.  Office  of Inspector  General,  Office of Evaluation  and Inspections,  Medicaid  Drug 
Use Review  Programs:  Lessons  Learned  by States,  (OEI-Ol-92-00800),  May  1995 (Draft 
Report). 
29. 	 Experiences  of Health  Plans  with Pharmacy  Benefit  Management  Companies, 
(OEI-01-95-001 lo),  December  1996. 
c-4  30.  In Massachusetts,  for example,  the Medicaid  agency  leadership  treats its PCCM 

program  as an internally  managed  health plan and manages  its fee-for-service  providers 

accordingly.  This  is reflected,  for example,  in its hospital  contracting  approaches  and in 

its system  of profiling  network  managers  and providers. 

31.  California  Department  of Health  Services,  Medical  Case Management:  A Successful 

Partnership,  September  1995. 

32.  It also bears  note that in May  1996, HCFA  sent to the State Medicaid  agencies  a 

draft  manual  issuance  that spells out various  options  available  to the States in carrying  out 

TPL responsibilities  in managed  care environments. 

33.  The Program  Integrity  Group has been established  to address  fraud and abuse issues 

affecting  the Medicare  and Medicaid  programs. 

34.  This  and the following  recommendation  were  made in our aforementioned  report 

entitled,  Experiences  of Health  Maintenance  Organizations  with Pharmacy  Benefit 

Management  Companies.  

35. The  1981 amendments  also allow  States to enroll  Medicaid  beneficiaries  in limited-

risk  managed  care organizations  (i.e.,  no risk  for inpatient  care)  that fail to meet Federal 

qualifications. 

36. The following  States have implemented  their  1115 waivers:  Alabama,  Arizona, 

California,  Delaware,  Hawaii,  Minnesota,  Ohio,  Oklahoma,  Oregon,  Rhode  Island, 

Tennessee,  and Vermont.  The following  States have approved  1115 waivers  that are 

pending  implementation:  Florida,  Illinois,  Kentucky,  Maryland,  and Massachusetts. 

South Carolina  has an approved  waiver  but no plans for implementation. 

37. States with  1115 waivers  under review  are:  Georgia,  Kansas,  Louisiana,  Missouri, 

New Hampshire,  New York,  Texas,  Utah,  and Washington. 

38.Federal  regulations  define  comprehensive  services  as either  inpatient  hospital  services 

and one other  mandatory  service  or three  or more mandatory  services 

(42 CFR 434.21).  Mandatory  services  are defined  in statute as inpatient  and outpatient 

care,  physicians  services,  and laboratory  and diagnostic  services,  among  others  (42 USC 

$1396d(a)). 

c-5