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MEDICAID 
MANAGED HEALTH CARE 
PROGRAMS 
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INSPECTOR GENERAL 
OFFICE  IF 
OFFICE OF ANAL 
INSPECTIONS 
YSIS  AND 
National Program Inspection  May 1987  \~..-    ..',

Off ice of Inspector General

The mission of the Office of Inspector General 
(OIG) is to pro-

mote the efficiency, effectiveness and integrity of programs 

the United States Department of Health and Human Services (HHS).
It does this by developing methods to .detect and prevent .fraud,
waste and abuse. Created by statute in 1976, the Inspector

General keeps both the Secretary and the Congress fully and

currently informed about programs or management problems and

recommends corrective action. The OIG performs its mission by

conducting audits, investigations and inspections with approxima
tely 1, 200 staff strategically located around the country. 
Office of Analysis and Inspections

produced by the Office of Analysis and
TIhins rsepporte  ctions is 
(OAI), one of the three major offices within the OIG. 
TIhen otvhere twso atrei gthe aOfft ions.  ice  of Audit and the Off  ice
. OAI conducts inspections which are typically, 
short-term studies designed to determine program effectiveness, 
efficiency and vulnerability to fraud or abuse. 
Report 
Th is 
Entitled "
Medicaid Managed Health Care Programs, " this study was
conducted . to describe 
State-implemented managed care programs and 
their perceived effectiveness in terms of meeting the medical 
needs of the patients enrolled in these programs. 
The report was prepared by the Reg ional Inspector General, Off ice 
VII. 
Participating in this
of Analysis and 
Inspections, Reg  ion 
project were the following people: 
Region VII, Kansas City
 Region I, Boston

Richard J. Meyer, Project Director
 Barry McCoy

Timothy Dold

Philip 
O' Hare
 Headquarters 
Region IX, San Francisco 
Annette Cameron

Mark Krushat 
Apryl Williams

penni St. Hilaire

Robert Grauman
 ':'
MEDICAID 
MANAGED HEALTH CARE 
I : ~ 
PROGRAMS 
(:~i 
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"0., 
RICHARD P. KUSSEROW 
INSPECTOR GENERAL 
MAY 1987 
\,,-,;1 
CONTROL *OAI-O7-86-0040  ,\:': :\~"'\
TABLE OF CONTENTS 
Page 
Executive Summary 
Findings 
troduction 
In 
i .  Access/Qual i ty of Managed Care 
utilization 
Why States Implement or Terminate Programs 
Rate Setting 
r,' 
Cost- Effectiveness 
ies 
L:,  Program Summar 
HCFA Comments 
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Executive Summary 
The Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35) 
States with the flexibil i 
prov ides  ty to develop managed care 
programs in which Medicaid recipients can enroll voluntarily or 
are assigned to a provider who authorizes the recipients I care. 
In order to be approved by the Health Care Financing
Administration 
(HCFA), these programs cannot exceed the cost of
fee-for-
serv ice, or restr ict emergency care, or substantially 
impair access to and quality of medical care.
The findings of th 
is report are based on a rev iew of other 
studies, and personal discussions with a total of 250 recipients, 
providers, and State agency personnel involved with 20 of the 31 
programs approved as of September 1985. Al though 1 imi ted 
number, we believe those discussions raised relevant issues about 
managed care programs. 
Findings 
Cost containment was the major reason for implementing managed
care programs. However, State data that we rev 
::cj  iewed was 
inconclus ive as to the cost-effectiveness of these programs, 
especially during the first several years of operation. 
Other concurrent State cost containment activities (such as 
diagnosis related group (DRG) systems, selective hospital 
con tracting, and limiting payment for emergency room serv ices)
may reduce the savings potential for managed care programs. 
Some States did not adequately consider factors such as 
age, sex,
aid category, geographic location, and third party payments 
establishing prepaid rates. 
the prepaid
rates being set too high, whiTchihs  resruletedd iun scomee d the cost-effofe  ctiveness of 
the program. 
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"""II 
Most of the managed care recipients we talked to (48/60) feel the 
quality of their care and access to care is the same or better
tIl  than fee-for- care. 
serv ice 
Some of the recipients we talked to (20/60) reported having
di ff icul ty obtain ing necessary 
care after normal office hours 
because they could not reach their case manager. Case managers 
ide 24-hour availabil i ty 
agree to prov  to care. 
Some States do not implement managed care programs (or terminate
them after implementation) because they are unable to obtain
physician, community, or legislative support and/or because they
cannot substantiate that the programs are cost-effective. 
-1- ). 
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Introduction 
Backqround 
The Medicaid program is a Federal-State program that was created 
in 1965 to prov  el ig ible poor people.
ide medical ass istance  for 
Approximately 22 million low-income people are presently covered 
by Medicaid. 
Since its creation in 1965, Medicaid has grown 'to be the single
largest item in most State budgets. Its rising costs have caused 
Congress and States to take action to contain Medicaid 
iI'  j~ 
 expendi tures.  Medicaid totaled 
Fiscal  year  1984 expenditures  for 
over $37 billion, the Federal share of which was 
$20 billion. 
Policy changes as a result of The Omnibus Budget Reconciliation

Act of 1981 (Public Law 97-35) provide States more flexibility to

for 
implement innovative approaches to providing health care 
Medicaid recipients. 
 the 
f':"  Federal government of Sctaetesr atrea abilen to  rpecerivoe wgairveras m requirements  from 
in order to 
implement changes that restrict the freedom of choice Medicaid 
care. 
recipients have in obtaining medical  Currently, more than
one-half of the States have received approval to alter their

f"'~ 
Medicaid programs to implement one or more types of managed

health care programs in an attempt to reduce Medicaid costs.

Managed care programs waive the statutory requirement of freedom 
of choice that individual Medicaid recipients have in obtaining 
qualified providers. 
Under a waiver approved by
services  from 
the Health Care Financing Administration 
CHCFA), States can

develop managed care programs in which recipients enroll

their 
mvoleundtariilyc oar alre  ascsiganedr teo a. s pecTifihc iprsovi depr rovider then serves as a gatekefor eper, who
receives. 
must authorize any care the recipient 
1i:;2, This provider
Ih,,"v  may be a pr ivate physician, part of a group practice, or a Health
Maintenance Organization (HMO). The objective of these programs
is to contain costs by el iminat ing unnecessary hospital emergency
~1:~
,~J  room and outpatient department visits, and to coordinate patient

care in order to eliminate the practice of recipients visiting

several physicians (" 
doctor shopping  To be approved, State
waiver requests must assure the Secretary that the costs of their 
managed care program will not exceed the 
costs of fee-for-

service, the program is consistent with the objective of the
Medicaid program, there is no restriction on emergency care, and
there is no substantial impairment of access to and qual i ty of
care. 
t~~ 
-2-
 "')' 
Managed care reimbursement systems that a State may choose to
develop for waiver consideration are: 
full capitation--a health care provider is paid a set monthly
I. ' 
amount for each recipient in return for providing the needed
medical services; therefore, the provider incurs a degree of
risk for services/charges that are in excess of the capitated'
payment; 
partial capitation--certain services may be paid based on a
I '  capitated rate and the provider incurs a lesser degree of 
risk; and 
modif ied fee-for-service--wi th or without case management
fees or incentive arrangements.
i , 
A State  s managed care program may include one or a combination 
systems. 
of the above reimbursement  For example, States may 
elect to reimburse HMO-type providers with a fully capitated 
payment, or designate physician case managers who receive a 
modified fee-for-service plus a case management fee. 
Case managers are physicians who are responsible for personally
providing general medical care for their clients, and
coordinating and monitoring specialized medical care and
emergency room treatment. The case manager must provide service
24 hours per day and is required to authorize all types of
medical services provided by other physicians and entities on 
behalf of their assigned recipients. They can be paid up to
their client' 
per month per patient for managing  s care. 
Purpose 
The purpose of this inspection was to describe State-implemented 
~:t~  managed care programs and their perceived effectiveness in terms 
of meeting the medical needs of the patients enrolled in these
programs. The objectives were to review reports on how States
determine whether managed care programs are cost-effective, and
rates are established. 
to determine how prepaid managed care 
about: 
also surveyed respondent attitudes  (1) access to and
quality of care; 
(2) changes in utilization patterns; (3) why
some States have not implemented managed care programs; and (4)
why some programs have been terminated. 
Methodoloqy 
At the time of our study, in September 1985, 31 managed care 
operation. 
programs were in  The programs were available to about 
3 million of the 22 million Medicaid recipients in the United
States. 
-3- !j ''':  ', , :: , 

Onsite visits were made to 20 programs located in Missouri,

Michigan, Wisconsin, Kentucky, Colorado, Kansas, California, 
York. 
Utah, and New  These States were selected because they have
most of the approved programs; some of these programs have been
in operation long enough that they have appli~d for a renewal;
some had terminated their program; and some chose not to ask for
a renewal of the waiver. 
We also contacted two States, Georgia and Mississippi, that at

the time of our inspection did not have an operational managed

care program.

Six of the 20 programs which we looked at were physician case 
management programs. Four of these programs paid a case 
not. 
managemen t fee. Two did  The remain ing 14 programs were
programs. 
capi tated  Capi tated programs pay the provider a set
fee for the services he/she agrees to provide to his/her Medicaid 
cl ien ts. A br ief summary of the 20 programs and whether they
were approved under Sections 1915(b) or 1115 of the Social 
ty Act, is included in the appendix. 
Secur 
The study was conducted by reviewing waiver applications and

oretnheewarls .r equests, and analyz ing studies conducted by States and
pc'  Personal discussions were held with 60 recipients;
physicians; 
31 other health care providers, such as HMO'
s and
clinics; 34 advocacy groups; 38 State Medicaid staff; 10 Health 
Care Financing Administration staff; and representatives from
G~O, OMB, and the National Governors Association. 
The
respondents we talked wi 
th were randomly selected from the
programs included in our study, and do not represent a
statistically valid sample. 
Managed care recipients were asked about their overall attitudes

and opinions concerning the effects that managed care programs

care.
~;:!t!  have had on their access to  We asked them to compare the

"",,'1 
quality of care they are receiving under the managed care program

to the quality of care they received under fee-for-service. 
~i~  We also asked managed care providers, advocacy groups, State and

Federal Medicaid 
staff, and other government representatives for 
their opin ions on the effects of managed care on access, qual i ty
and utilization of medical services. 
-4-
 , ' 
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Managed Care 
Access/Quality of 
The study found that the elements that most affect the attitudes 
about access to medical care and the qual i ty of that care are 
availabil i ty after hours, restr 
physic ian  ictions on emergency 
room care, how recipients are assigned a case manager, and how 
ial ized care are handled. 
referrals for spec 
Section 1915(b) of the Social Security Act provides that a 
Medicaid State Agency, in applying for a managed care waiver, 
services is 
must document that reasonable access to quality 
assured for recipients enrolled in an approved case management
system. 
We asked 60 Medicaid recipients enrolled in var ious types of 
was easier for them to receive 
managed care programs whether  it 
medical care now than before they enrolled., Of these, 48 (80 
LTi;'  percent) said that access to medical care is the same or better 
.rL ,8  than before they enrolled in a managed care program. Twelve (20 
percent) said it is more difficult for them to receive medical
care now.
ACCESS 
F9J 
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Our findings corroborated an internal study conducted by the 
State of Kansas. It found 67 percent of the managed care 
recipients said access to care was about the same, 13 percent 
thought it was easier, and 20 percent said it was more difficult
i\';."~ 
for them to get medical care now than before they were enrolled
in a managed care program.
-5- : j
,:~' ,~
PROVIDER
AVAILABILITY
c-.
Most 
1"' (71 percent) of the 60 recipients we talked to had no 
hours. 
problems contacting their case managers after 
Some of the 
statements made by recipients who had problems contacting their 
case managers after hours were: 
Can  t get in touch with a doctor.  Just get their answering
service. " 
One $unday evening I needed care and it was difficult to get
in touch with my doctor to get approval to go to the hospital 
emergency room. 
f\f)
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An internal study by the Michigan League for Human Services 
showed that 30 percent of their managed care recipients needed to 
hours. 
contact their doctor after  Forty-seven percent of these
were assisted by their case manager. Thirteen percent waited for
the office to open or ' handled the problem themselves. Twenty-
five percent tried to call their case manager and did not get an 
room. 
answer so they went to the emergency  Fifteen percent did
not know where to call and also went to the emergency room. 
study, 
Based on the findings of the  40 percent of the recipients
ended up at the emergency room because they could not reach their
case manager even though case managers agreed to be available 
hours a day. 
0'?:\\
-6-
i' ;  QUALITY OF CARE

, I '
: f ' 
A small portion (19 percent) of the 60 recipients we talked to

felt the care they are receiving under managed care 
is worse than

receiving. 
the care they had been 
They complain about not .being
able to contact their case manager after 
hours, transportation
problems resulting from being assigned to a doctor other than 
their regular doctor, and referral problems. 
Ninety percent of the 63 physicians we talked to felt that the

quality of the care received by managed care recipients was as

before. 
good or better than the care they received 
Ten percent
felt it was worse, and related this decline 
in the quality of the
care to the recipient being assigned to a doctor other than the

physician who had been treating them regularly. Of 
the 60

recipients we talked with, 80 percent had selected the plan of
care they are using and twenty percent were assigned. 
An internal study by Kansas reflected similar findings. 
They
interviewed physicians who participated 
in a managed care
program. 
Seventy percent of the physicians interviewed thought 
the quality of care was the same, and 20 percent said managed

care improved the quality of care because continuity of care was

improved. The remaining 10 percent thought the quality of the

ved was worse.

care rece 
The regulations preclude States from restr icting freedom of 
choice if it results in a reduction in the quality of services
provided. 
One of the States we visited issued restricted 
Medicaid cards to recipients who did not enroll 
in the managed

care program, which denied payment 
care except in emergencies.  for these recipients ' medical

HCFA did not approve the renewal
request for this managed care program because of this
restriction. 
-7- Referrals
Recipients and case managers were asked to comment on the
referral process. 
About three-fourths of the recipients who 
wraenf eterdr ead r.e ferral to another doctor or a spec ial ist were
The reason most often given by the case manager for 
not making the referral was that they felt they could handle the
problem. 
The doctor would talk to the patient and try to 
convince them that the referral was not necessary: 
I feel are necessary. 
I tell them the services  If they 
on doing something di 
ins ist  fferent, I suggest they get
another doctor. 
feel is necessary. 
We tell them what we  If they choose to 
do something else they have to pay for it themselves. 
For those in the gray zone I make the referral to avoid a 
lawsui t. " 
Private physicians and other health care providers don t like the 
procedures for making referrals to other doctors because (1) they
feel it involves too much paperwork, and (2) once a referral
made, the referr 
f\"" ing phys  should not be necessary
ic ian feels  it 
for him/her to continue to follow-up on the referral. Some
physicians involved with an HMO or other type of capitated plan
feel they are res tr icted 
from making some referrals they feel are
of these referrals. 
necessary because of the added cost 
Emergency room restrictions 
Patients, and providers 
expressed concerns about monitoring 
emergency room usage. Physicians are concerned about their
liability when the emergency room calls and asks them to 
:Co authorize or refuse treatment without seeing the patient.
:"i~
Patients are also unhappy with attempts to monitor their
emergency room usage. '
Some of the comments made by recipients 
were: 
' t 
I don  like the plan, because by the time I call my sponsor
to see if he thinks it' 
s an emergency my children and I could 
be dying or dead. 
When I wen t to the emergency room, I had to call my baby I 
sponsor to get his approval first. I don t think this 
program should apply in emergency cases. 
-8- : \
);.~""'~ ,\, \ 
The effect of these efforts on reducing emergency room usage are 
report. 
covered in the utilization section of this 
Complaint Systems 
Several States have implemented a system for monitoring client
complaints and problems about access and quality of care and 
recipient attitudes about the program they are using for their 
health care. The system typically consists of a phone number 
that the recipients can call if they have a complaint or a
problem. 
Two of the States we visited said these monitoring 
systems are not providing the amount of feedback on recipient 
would. 
attitudes they thought they  In one State, 80 percent of
the cl ien ts did not know about the number. A busy signal study
conducted by the phone company in another state found that during 
a typical one-week per iod, over 3, 500 calls to the number to call 
about complaints, problems or provider questions could not be 
up. 
completed because the lines were tied  Those clients that do
reach the complaint off ice 
complain most about the restrictions 
on emergency room usage and being assigned to a doctor other than 
their regular doctor. 
Summary 
More positive recipient attitudes, and more appropriate recipient 
can be effected if the States take action to address 
util ization 
the problems of recipients being unable to contact their case 
manager after hours, being assigned to a doctor other than their 
regular physician, and not being able to get in touch with 
someone if they have a problem. 
While physicians had positive comments about the program, and see
managed care as a way to provide continuity of care, reduce 
overutilization, and maintain or increase their patient load,
toey continue to have concerns about their liability when they 
visits. 
are asked to pre-authorize emergency room 
i, i 
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-9- , ' 
;;';";,' 
Utilization
We found that many of the physician case managers and State 
agencies we talked to did not know the effect of their managed 
care program on utilization of health services. 
Of the 63 physicians we talked to, 45 perceived no change in the 
number of office visits by recipients enrolled in managed care
programs. 
These physician case managers felt confident about 
responding to this question as most had provided care to the same 
patients on a fee-for-service basis. Eight physicians thought
the number of office visits decreased and five physicians thought 
office visits had increased. The remaining five physicians did
not know. 
About one-half of the physician case managers thought the number 
of visits to emergency rooms and out patient departments had 
decreased as a result of Medicaid recipients being enrolled
their managed care program. 
Forty-four percent of the case
managers didn 
t know whether emergency room usage had changed 
even though they are responsible for authoriz ing all care,
'7;  including emergency room and out patient services. 
The 60 recipients we contacted were also asked how often they see 
a doctor now compared to before they were enrolled in a managed
care program. The following chart reflects their responses: 
DOCTOR VISITS 
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10- ,.', , 
the States we vis i ted 
compared emergency room usage before
Tawon  d oaf  fter the 
ir programs were implemented. 
them found
that for a 12-mon th per  iod,  cemlieergnetnsc.y  room exOnep  endof i tures decreased 
36 percent for managed care  They were unable to tell 
from their data whether this was because  of  managed care, or the 
other efforts at reducing emergency room usage. A
result  of 
hospital administrator said the decline in his hospital was due 
ians becoming more sens it i ve to the need to do all they 
to phys  ic 
sending their patients to the 
can in their  office  instead  of 
emergency room. 
The other State had anticipated that their managed care program 
would produce significant savings in emergency room usage. These
savings did not mater ialize because the State changed its
Medicaid reimbursement policies for emergency room care for all
Medicaid recipients. The State no longer pays the emergency room
rate for routine medical care provided in the emergency room.
Hospitals are paid the standard office visit fee-for-service for
I, " 
routine care. This has reduced emergency room usage by all
Medicaid recipients because the hospitals only provide emergency 
recipients. 
care for these  visiRte.c ipients needing routine care are 
This State compared emergency room
referred for an  office 
usage for managed care recipients to those not enrolled 
in the
program and found the impact on emergency room use to be 
r"' 
negligible, because  of  the overall reduction in emergency room
utilization which resulted from the reimbursement changes. 
The emphasis in the Medicaid program fee-for-service 
reimbursement program is on monitoring overutilization to detect
ins tances where phys ic ians prov ide unneeded serv ices, since 
reimbursement for the physician is based on the number and type 
bi lIed to the program. 
of  serv ice  Phys  ic  ian bill ings are
mon i 
tored to identify those phys  ic  ians that prov ide more than the 
services per patient and/or at a higher than
normal amount  of 
normal cost. Monitoring systems for prepaid health plans must 
look at underutilization, denial  cofa  reserv.ic es, poor quality
care, and excessive barriers to  These physicians are paid
the same amount for each patient whether or not the patient 
provided medical care. Physicians in these prepaid plans should
be monitored to identify those physicians that are providing less 
services per patient. Systems to 
than the normal amount  of 
provide this type ted.  of  monitoring were not in place in the programs 
we vis 
I." 
11- " '
Why States Implement
" 1

Terminate Managed Care Programs 
State Program Directors said that Medicaid cost containment was

the major reason for applying for a waiver to implement managed

reason. 
care programs, but not the only  There was an expectation
that continuity of care for the recipient as a result of managed 
care would result in better health care delivery to Medicaid 
costs. 
recipients and reduce Medicaid  Another important factor
was greater control of 
the Medicaid
Program.  fraud, abuse, and waste  in 
Recipients would not be able to use unnecessary 
services, and the provider would have an incentive not to exceed 
group. 
the norms of his/her peer  In states with a county 
operated system, managed care was seen as a mechanism to return 
program control to the county. 
State agency efforts to successfully implement a waiver involved

long-range planning of one to three years for all but one of the

waiver programs. 
ted had to make
leg islative changesSe vetn oof  thae nuinte hStaoters  we ivzis e these programs. Seventeen (50
percent) of the advocacy groups we talked with were extens ively 
the States ' waiver request( s). Case workers were 
involved  in  recipients. 
used to explain the choices available to the  Fiscal 
agents were extensively involved in implementing about a third of
the managed care systems. HMO' s were also involved because of 
their expertise in rate setting. 
Physician support of the case management plan was essential 

!~!M  approved. 
order to get the plan  Ninety percent of the 63 
physicians we talked to stated that their Medicaid patient load 
had either remained the same or increased as a result of partici
program. In 
pating in the managed care  one State where the 
managed care program would have limited their patient load to

500 clients, the physicians were able to get an injunction 
against the program until this restriction was raised to 2, 
000
patients. 
To ensure physician participation, one State selected a waiver

proposal submitted by local physicians. The State s decision in
favor of the physician plan gave the State the opportunity to

enroll private physicians who would otherwise have been opposed

to a managed care program. This was very important since
resistance to initial waiver applications in three States was
from physician groups. 
In one case, physician opposition to the

-12- '.'
waiver was covered in the local press to the extent that
became a pol i tical issue and was part of the reason the waiver 
was not renewed. 
Only three waiver program directors said that ' 
they had no
recipient enrollment problems. 
The most common type of waiver
enrollment problem 
was the recipient who did not select a
provider. 
primary care physician or HMO  When recipients did not
clients. 
select a case manager, the program assigned 
f'C  getting a
Another problem faced by waiver program directorrse  newed.  is 
waiver approved or  Out of 54 waiver approval or renewal
requests, 
43 percent have either been withdrawn or disapproved by
HCFA. 
The primary reason for not approving a waiver program 
because of insufficient cost savings documentation. State
II ",  ) 
respondents said that initially a receptive Federal environment 
and the cost cutting efforts by State Medicaid programs made 
fairly easy to get approval of a waiver proposal. Now HCFA is 
initial 
requiring more cost-effectiveness documentation for 
renewals. 
waivers and waiver  This change in requirements to
receive approval for a waiver is very frustrating for the States.
They feel they need more specifics on the documentation required 
effectiveness. 
to prove cost- Two States included in our study 
waiver. 
fI" '1'   do not have an approved managed health care  There has
been a lack of legislative initiative in each State, although
there have been some preliminary discussions on cost savings 
in one of the States. 
coming from the legislature  In one of the
States, the State leg 
islature has been approached several times
by the Medicaid State Agency for support of a waiver program. 
Summary 
Our study found that States are interested in implementing
managed care waivers because they think they can save money,
improve care, and better control recipient and provider fraud and
~~:l  abuse. 
The problems they have in trying to implement or renew a
waiver are: 
t0~	 Physician opposition if they feel it may reduce their
Medicaid patient load. 
Advocacy groups opposition to restrictions on recipient 
freedom of choice. 
Lack of leg 
islative support to make the changes required to 
implement the program. 
Inability to provide data that proves the program 
effective.  is cost-
requiring better cost-effective
HCFA  is 
documentation now than when the waiver legislation was
or ig inally implemented. 
-13- .:. " '' '
Rate Setting 
Our study found that States use a variety of methods to establish 
rates. 
their prepaid  Several States used the prepayment
rate. 
information from another State to set their capitation 
One 
State, since their experience with prepaid plans was limited,
relied primarily on Statewide fee-for-service data and prepaid
plan data from another State to establish the rates for their 
1115 demonstration project. A spokesman for that State said that
they had overestimated hospital costs for the AFDC category and
that Statewide Medicaid cost containment efforts were not 
set. 
correctly estimated when the prepaid rates were  This 
resulted in the capitation rates being set too high.
i , 
C " 
In some State plans, factors such as age, sex, aid category and
geographical location were used to sse.t  capitation rates. This is 
similar to the process used by HMO'  In other States, a fee 
for-
serv ice payment amount was used. Those States that did not 
have experience with prepaid capitation programs often relied on 
professional consultants to develop the capitation rates.
Consultant fees for these services were as much as $70, 
000 which 
was an additional start-up cost. 
r"'
In one State Program, HCFA approved a capitation rate based on 
100 percent of fee-for-service and an incentive pool. HCFA would 
not renew the waiver because the capitation rate and incentive 
pool payment was more than 100 percent of fee-for-service. The 
State believed that the amount paid from an incentive pool based
on projected savings should not be considered as part of the
capitation amount, even if the ' 
projected savings did not
materialize and resul 
ted in the program costing more than under
fee-for-
serv ice. 
O'S'l
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Another reimbursement methodology involving local county control
t\~;1 
of a program was des igned to save 5 percent over fee-for-
serv ice.
The State calculated the fee-for-service costs by aid category
covered in the program and determined that the payment to the 
county would be 5 percent less. 
savings of 5 percent; However, 1T.h i2s  shopuled hravce reesnultted  of the 5 percentin held
back by the State was paid to the county for administrative
costs. 
This reduced the maximum savings to 3. 8 percent less than
would have been paid under fee-for-service. The 3. 8 percent
projected savings were further reduced by other expenses such as
start-
up costs, and duplicated administrative 
costs, such as the
amount paid to the fiscal agent to process enrollments and
disenrollments, pay providers, and produce report information.
The State and the county both provided these serv ices. 
Also, the
county hired a medical director and other staff to administer the 
program. 
The county budgeted their administrative costs at 
Sbettaweteen.  3 and 4 percent but received only 1. 2 percent from the
The State does not feel they can provide the county more
than 1. 2 percent since they still have substantial fixed costs
for the program. 
The resul t is that the 5 percent sav ings
projected in the waiver request when the 
rates were established
are not materializing. 
-14 ' ,
Determining the capitation rate also involves deciding how
collections from pr ivate insurance and other third party payers
will be handled. One State plan provides the option for the
provider to collect the amounts from the third party or let the
State do it. If the provider collects the third party payments, 
the State projects the amount that would have been collected from 
the third parties for the recipients covered by the provider and 
accordingly. 
reduces the capitation rate  The State does not 
track third party collections to determine whether the amount 
projected equals the amount actually collected. 
rate setting is to reduce Medicaid spending
The current trend  in 
by setting limits on the amounts paid to a provider (prepaid
plans), reducing the use of expensive emergency room care, and
eliminating doctor 
shopping, so that more services can be
clients. 
provided for more  Most of these efforts are designed to
reduce the program costs of the services provided. Our study
found that the same effort is not being directed at reducing
administrative costs. In fact, in some cases, these costs are
increasing. 
Additional systems are being developed, consultants 
are being hired to help with the rate setting  extra esttcaf.f  are 
being hired to enroll recipients, answer questions,  While 
setting lower rates for the amount paid for the service provided
I' ,  Medicaid rec 
ipients can reduce Medicaid program expenditures, 
these reductions may be more than offset by increases 
in the 
programs. 
administrative costs of these  These increases should 
projections of the
cbe oa csontsi-deration  in  the rate setting and  in 
effectiveness of these programs. The States should make the 
same concerted efforts to reduce both administrative and program
costs. 
Some managed care programs that we looked at provided coverage 
for AFDC eligibles and SSI Medicaid-eligibles~ Others restricted 
coverage , to only AFDC mothers and children. Medicaid 
expendi tures for the AFDC population for fee-for-service are 
percent of the total expenditures, as compared to 72 percent for 
ScSoI sMtesd.i caid-eligibles for fee-for-service and nursing home
Therefore, in 
order to realize the maximum amount of 
sav ings for these programs, States should be encouraged to
include SSI Medicaid-eligibles 
(not in nursing homes) in their
managed care programs. 
ELIGIBILITY  EXPENDITURES 
IWI 
OTHER 
III 
OTHER 67. 
15- (..  $ (

, , 
Cost-Effectiveness 
Section 1915(b) of the Social Security Act provides that in its
waiver request to implement a 1915 (b) case management program- the
State must present sufficient documentation that reasonably 
supports a conclusion thdt the project will be cost-
effective and

efficient and consistent with the objectives of the Medicaid

program. Total costs 
must be shown under the waiver for program
benefits, administrative costs, systems modification, marketing
items. 
incentives and similar  These costs and savings must then
be compared wi th costs and sav ings which would have been incurred 
the State for like services for recipients without a waiver. 
in 
Unlike the 1915 (b) waivers there are no regulations requir 
effective.  ing the
1115 demonstration projects to be cost-
HCFA Central 
Off ice approves the appl ications and moni tors all demonstration
projects. 
States Projected Savings

We reviewed data that three of the States with 1915(b) physician
case management programs presented to HCFA during the first

esevferfal eyeacrst ofi ovpereatinone tos ssupp.ort  tAhe s shown by the following ir stacotnicslt iucs si,o nt hoef cos
reported savings based on States ' projections did not materialize
or included sav 
ings from other sources. 
Kansas Pr imary Care 
Network 
Case Management Fee  $839, 196. 
Reported Sav ings 471, 581. 
Added Cost  $367, 614. 
Colorado Phys ic ian Sponsor 
Estimated Sav ings  $2, 663, 000. 
Actual added Cost  $988, 800. 
Michigan Physician Primary

Sponsor Plan
 1982  1983 
Admin. Costs 
$264, 492  $ 593, 844 
Case Mgmt. Fees
 141  441, 603
Program Costs
$267, 633  $1, 035, 447 
*program sav ings
842  821, 382
Added cos t  $(261, 791) 
214, 06 5 
ings 
**Less projected HMO savings  -121, 065  272, 889 
Sav ings/Loss with 
HMO sav  $ (140, 726)  58, 824 
*The same projected program savings of $5. 58 per recipient
per month was used for both years. 
**HMO Sav ings were based on the theory that HMO enrollmen 
increased because of compet it ion caused by managed ca re. 
-16- :.; 
/:,-,- " ,
Kansas did a compar ison study between clients enrolled 
in a
managed care program and cl 
ients not covered by managed care
programs. 
The study covered 12 months pr ior to, and 12 mon ths 
the managed care program. Since other
after, implementation  of 
major program changes were implemented at the same time, the
compar isons  increase or decrease 
were based  on  the percentage  of 
in secvices between counties with or without managed care 
programs. 
The study showed a $20. 23 savings per year per recipient 
in the 
coun ties with managed care programs. However, these sav 
ings did
not take into account the $3 monthly per client case management 
fee paid to managed care physicians, or additional ongoing 
administrative costs caused by managed care, such as the State
central office administrative costs and a monthly fee paid to the
fiscal agent. 
Also, the projected savings did not include the 
over $150, 000 paid to the fiscal agent, or the 
initial cost  of 
a new staff person added to monitor the managed care 
salary  of 
program. 
If just the $36 per year cost (12 months x  the case
management fee is added to the average yearl$3)y   coof st per recipient,
the result is a yearly increase  $15. 77 per cl ient for
in cost  of 
managed care recipients ($36. 00 - 20. 23 = $15. 77) rather than a 
savings  of  $20. 23 per client. Projecting this increas'e to the
total managed care population for 
this State (23, 311 recipients) 
$367, 614 over
rfesuelts e-for-in an  additional Medicaid expenditure  period.  of 
service in a 12-month  This increase does not 
the other addi tional administrative 
take into accouintn  curred witahny  otf he project. 
cos ts 
The Colorado waiver renewal request projected that the program
would save $2, 663, 000 for the AFDC-Adults and Children and SSI 
Medicaid-eligibles covered by the program. The State collected
data on actual monthly Medicaid expenditures for the 
12 months 
pr ior to implementing the program and used this to project future
savings. 
projected enrollment in 
Estimated savings were based  on 
the program and reduced cost  of  services provided by the program. 
We reviewed actual monthly expenditures for these Medicaid 
recipients for 12 months prior to 
the program,
and 12 months after implementatioimnple.me ntTatiohn e data showof ed that the 
03. If 
monthly cost per recipient had 
increased $1.  the $1. 03 per
recipient per month is projected to the State s estimated 80, 000
Medicaid-el ig 
care program wiboleus, lthde a ddbiteion al$ ye9ar8ly 8co,sts  of  the managed
$2, 663, 000.  800, rather than a savings 
17-
 ,", ':'
Michigan compared the cost of services for clients that were on 
I.. .  fee-for- managed care. During 
service to the ones enrolled  in 
1982 and 1983, the program lost $475, 856 after costs of operation
and start up costs were considered. To offset this, the state 
calculated a dollar savings for the managed care program based on 
programs.  I S are 
increased enrollment in HMO  The HMO  not part of 
in this State. 
the managed care system  This produced a net 
in 1983. 
program savings  The theory was that competition created 
for the HMO' s by the managed care program caused HMO' s to
increase thei r  ipients. 
efforts to enroll rec 
i .

These three States had collected more cost data than other States

in order to evaluate the cost-effectiveness of their programs.

They are continuing to work with HCFA to explore methods of

making their programs cost-effective. One example of this is in 
iminating the 
Kansas, where they are looking at reducing or el 
fee. 
case management 
Summary 
Cost containment is the primary reason States implement managed

care programs. Our study found that the following problems make

it difficult to substantiate a clear finding of cost-

ro'  effectiveness. 
ig inal 
In order to be renewed beyond the or  2 years the 
program must show that total costs, systems modifications, 
marketing and administrative costs do not exceed the costs 
waiver. 
that would have been incurred without the  Absorbing 
these first 2 years of operation makes it 
these costs  in  is cost-effective. 
difficult to show the program  Spreading 
these costs over more than 2 years would make it eas ier 
prove cost-effectiveness. 
Paying a case management fee increases program costs. 
Eliminating the case management fee could make programs more 
cost-effective. One program would have fseavee.d  about $470, 000 
if they had not paid a case management  Paying the case 
management fee r~sulted in the program losing over $360, 000. 
Establishing prepaid fates that reflect the population being 
served under a capitated plan is difficult to do and also 
affects the cost-effectiveness of the program. 
l;i8 
-18-
 \. .
Appendix 
Summar ies of Reviewed Managed Care Programs 
1915 (b) Case Management Programs 
Kansas Pr imary Care Network 
This program covers 23, 
000 AFDC recipients in two rural 
county. 
counties and one urban  Physician case managers are 
paid the regular fee-for-service plus a $3 case management 
month. 
fee per enrolled recipient per  The program is being 
counties. 
expanded to five other 
California Primary Care Case Management 
Two organizations provide care to about 2, 000 AFDC and SSI 
Los Angeles and San Diego counties. 
Medicaid enrollees  in  at 95 percent 
Reimbursement is capi tated  of fee-for-serv ice. 
Ambulatory patient care con tains a $10, 000 stop loss 
('C  provision with the exception of dialysis services. The State 
plans to expand the program. 
California Selective Hospital Contracting 
exception of psychiatr ic 
All hospitals Statewide, with the 
hospi tals, rural hospitals and areas in other pilot projects, 
program. 
are included in the  The program provides all
inpatient hospital services for 2. 8 million eligible
recipients. 
Each hospital is reimbursed a negotiated per 
service data. 
determined by using fee-for-
diem rate, which  is  s office visits. 
The program does not cover doctor 
Michigan Primary Physician Sponsor Plan 
Approximately 70, 
000 AFDC recipients in a large urban 
in the program. 
population county are enrolled  Reimbursement 
is 100 percent fee-for-fseeerv.i ce plus a $3 per recipient per 
month case management  The State is working wi th HCFA to 
renew the program. 
Michigan Capitated Ambulatory Program 
This program serves approximately 4, 500 rec ipients. All
program. 
Medicaid recipients are covered by the  The 
providers are paid a capitated rate based on 100 percent of
fee-
for-service. They are at risk for provided services, but 
costs. 
not for inpatient  Additional reimbursement 
provided if inpatient hospital costs are reduced by 
percen t. 
-19- ,"';"';""' -\
Michigan 6-month HMO Program
meet the 75/25 ratio
This waiver covers two HMOs that did  mix. All cnaot tegories of aid are,
of private/public patient 
I..  covered wi th the exception of general ass 
istance and
medically needy. 
There are almost 42, 000 recipients covered
by this program. The reimbursed rate  fee
for- is 90 percent of 
serv ice. 
Michigan Primary Mental Health Clinic Sponsor Program
All mental health outpatient services and day treatment 
in the program. 
programs are included  The purpose is to 
reduce costly insti tutional care. Coverage is Statewide, 
one rural county, and applies to all Medicaid 
except  for 
recipients in need of mental health services. Reimbursement 
is limited to a $42 per day maximum capitated rate. 
ticare 
Kentucky Ci 
A Health Insuring Organization established a prepaid 
in one large urban county. 
capitated program  About 40, 000 
AFDC and medically needy recipients were covered under the
waiver. 
Providers were paid a capitated rate of 95 percent
for- pool. 
of fee- service plus a provider incentive  The State 
to renew this waiver. 
chose  not 
Colorado Pr imary Care Phys ic ian Program 
This is a Statewide physician case management program. 
The
physicians are paid on a fee-for-
service basis and also 
receive an incentive pool payment twice a year. No case 
are paid. 
All AFDC adul ts and children not 
meannagermenot lled in feeas  n HMO are required to enroll in the program.
f:N!  total of 53, 000 recipients are enrolled. 
t:fu\'i 
Wisconsin Mental Heal 
th Gate Keeper Plan 
\':1 
Statewide, except  for  two large urban counties. It covers
420, 000 recipients who can receive outpatient and
profess ional day treatment serv ices, pI us insti tutional care 
age. 
persons 22-64 years of  This is a fee-for-service 
for 
program with  no  case management  fee.  The objective is to 
contain costs, curb abuse, and provide integrity to the pro 
ider. 
~\8j 
-20-
 wiscons in HMO Preferred Enrollment In  tiat ive 
l J 
Thirteen HMOs with 120, 000 AFDC recipients in two large urban 
program. 
counties are included in the  They operate under 
rate. 
risk contracts and are paid a monthly capitated  The 
waiver and is 
an extens ion of the 
State plans to apply  for 
providers to lower contract
cbonitedmplsat.in g incentives  for 
Utah Selective Hospital Contracting 
This program was never implemented, based on a study that
recommended a DRG-related system ' over the selective
contracting model. 
It was determined that selective 
contracting serves only as a temporary means of controlling 
solution. 
costs rather than a long-term  This program does 
s office visits. 
not cover doctor 
Hospital Re imbursemen t 
Utah DRG Method  for 
The DRG program is Statewide and covers all hospital
inpatient services. 
cover emergency room or
It does  not 
outpatient services. The State adopted HCFA' s DRG codes with 
some modif ications.  include any stop-
The program does  pools.  not 
loss provisions or incentive  Preliminary data shows
inpatient costs have dropped for each of the last 2 years. 
Utah Soc ial Services Prepaid Health Plan 
This is a Statewide program that covers all Mental Health
Clinics. 
About 60, 000 recipients diagnosed as 
tally ill,
handicapped/developmen tally disabled, men 
functionally 
impaired, or substance abusers are covered under
this program. The State plans to continue this program. 
Utah Choice of HMO or Primary Care Network 
This program offers the recipient the choice between one of 
two HMOs or a physician case manager program. The program is
offered Statewide, with the exception of rural counties which
do not have HMOs. 
All 43, 000 Medicaid recipients are covered
under the program. 
The physicians are paid 100 percent of
fee-for-
service. No case management fees or incentive pools
program. 
are included in the  Each of the HMOs has its own 
rates based on the recipient' s eligibility category. 
New York 5-Month HMO Lock-In Program 
This program involved two HMOs in two suburbs. Only 71 AFDC
recipients were enrolled in these two HMOs. Due to the small 
enrollment, the waiver was terminated after 2 years of
operation. 
-21- ~. ~.\.
1115 Demonstration Projects 
Prepaid Heal th Project 
Missour 
This program provides a choice of pre-
paid health plans or a
physician sponsofre epl.a n. The case managers are paid a $1. 
case management  The program covers one large urban
county with 27, 500 AFDC and unemployed parent recipients.
Expansion to other urban counties 
, 0  is anticipated. 
County Medicap Plan 
New York  Monroe 
i )  Since  Monroe  County had experience with HMOs, the State
received a demonstration grant to test enrolling the Medicaid
population in a prepaid capi tated program. 
The rates are
service. 
based on 95 percent of fee-for- projected enrollment
is 58, 000 recipients. Expansion will be considered based on
the results of the program. 
f" , 
California Santa Barbara Health Initiative 
Eligible recipients 
000. All
in this county total 21, 
r~" categories of aid are included under the waiver. Any health
care provider who wishes to receive payment for services
rendered to recipients 
do so only by
in this countIy nitiativeca n (HI). 
contracting with the Health 
The capitated
service. 
payments to the HI are 95 percent of fee-for- This
has been converted into monthly rates per recipient and aid
category. 
The majority of recipients have case managers that
are paid this monthly rate based 
on the number of recipients
assigned to them. 
California Monterey County Health Initiative 
fJ~\;i
\,;\oj
c'hJ
This program was developed as a demonstration project to test
r~1 the feasibility of a competitive case management medical care
model. 
The Medi-Cal recipients in this county totalled
000. All 
26,  were included in this project. A $3 per
recipient case management fee was paid to the case managers.
The project is now bankrupt. 
i;,
-22- ?.'\'~.,:,":'.'), 
Health Care Financing Administration 
Comments on 
OIG Draft Medicaid Managed Health Care Programs 
The Heal th Care Financing Administration (HCFA) was br iefed on 
the initial findings of the study prior to preparing the draft 
report, and later given an opportunity to comment on the draft
report. 
Their comments have been very helpful in preparing the
final report. 
Some of the major areas addressed by their
comments were: 
The point was made that this report was not clear as to
whether the data we looked at showed that these programs cost 
more than they save, or that the data is inconclusive. The
i .  report has been clar if ied to state that 
the data we looked at 
was inconclusive in showing whether these programs are cost-
effective. 
Concern was expressed with our finding that elimination of 
the $3 per month case management fee would make the programs
more cost-effective. HCFA made the point that if this does 
not result in exceeding the cost of providing similar 
services under the ongoing State Medicaid program, the
met. 
statutory and regulatory requirements are  While we 
agree, we still feel States should be encouraged to follow 
the example of two States offering other incentives to 
encourage physician participation, saving $2 million per year
by not paying a case management fee, and thereby increasing
the cost-effectiveness of the program. 
Conc~rn was expressed ,with added administrative costs that 
would result from modif ing the State Medicaid Management 
Information System (MMIS) to assess cost-effectiveness and 
qual i ty of care for managed care programs. One of the 
'1, 
primary ~indings of our study was that no systems exist to
measure the cost-effective of these programs or if they
provide quality care to the recipients participating in them.
While 
ffi\  implementing systems to do this will no doubt add to 
the administrative cos,t of these programs, we believe the
costs would be justified, just as they are by other ongoing 
State Medicaid Programs. 
In response to our finding that States feel they need more 
istance in areas such as the cr iter ia 
techn ical ass  used by
HCFA to evaluate cost-effectivenss, the point was made by
HCFA that they do provide this assistance but that there is a 
limit on how much they can do and still meet the statutory 
requirements of providing States with maximum flexibility to 
establish these programs. We have clarified this section as 
to the type of technical assistance we are suggesting. 
-23- , , 
The point was made that our suggestion to include the SSI 
Medicaid population would not result in as large a savings as
indicated, since much of the SSI Medicaid cost involves 
nursing home expenses that would not be included in a managed
care program. We have clar if ied this sec-tion of the report. 
Several comments' wer e made about areas of the report that did
not specify whether the type of program being discussed was a
Act. 
waiver approved under Section 1915b or 1115 of the 
this. 
have corrected 
Other comments involved suggested clarification and word 
changes which we have made. 
;Lo
:~1
-24-