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 OIG’s 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. 

OEI’s 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-forservice 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-forservice 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 

responsibilities that call for them to apply sound 

business practices and remain closely attuned to 

the health care marketplace. In both these 

respects, they find little guidance in the past 

policies and practices of their agencies. 

In recent years, articles, books, and reports have 

been produced that explain these new 

responsibilities and that indicate how the States 

have been responding to them. * There has been 

much less attention to the organizational 

challenges the Medicaid agencies confront as they 

carry out their new managed care responsibilities. * 

They call for the agencies to reengineer themselves, 

State Medicaid Agency 

Managed Care Responsibilities 

. Definingtypeso,managedcc2re, 

. Developing health plan contracts. 

. Negotiating rates. 

, Educating benejiciaties. 

. Educating providers. 

: 

Ensuring patient access to providers, 

Coordinating with other agencies. 

. Meeting with stakeholders. 

. Developing new duta systems. 

* Overseeingheazthplans, 

Yet, the challenges are fundamentaL3 

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 President’s 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 agency’s prior 

experience with managed care,*’ the size of the State’s 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-forservice 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. Feefor-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 agencies’s 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 agency’s 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 California’s “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 

out-of-State conference. Am-i1 1996.) 

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 illsuited. 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 

Agency role 

Management approach 

Areas of responsibility 

Approaches to 

responsibility 

Goal 

Purchasing strategy 

Eligibles 

Provider relationships 

Managed care 

contractors 

Accountability 

Quality 

Purchasing role 

Old Approach 

Service agency 

Mix of assistance, 

collaboration, regulatory, 

and contractual 

Individual programs 

Regulation 

Operating programs 

Reimbursement of 

individual services 

Recipients 

Individual service 

providers 

HMOs 

State and provider 

Regulatory approach 

Through counties and 

tribes; directly with 

individual providers 

New Approach 

Service agency for non-health 

care/purchaser for health care 

Business contractual relations for 

health care purchasing; 

collaborative approach for nonhealth care 

Population based rather than 

program based 

Flexible strategies for 

contracting for specific results 

Assuring value: access, 

accountability, and affordability 

Managed competition 

Enrollees 

Care delivery network 

Managed network care delivery 

systems 

Individual, state, care delivery 

networks 

Quality improvement systematic 

Joint purchasing strategies 

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 agency’s 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 agency’s 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,*’ 

In one traditional fee-for-service 

sphere--surveillance and 

utilization review (SURS)--the 

momentum toward staff 

redeployment appears to be 

gaining particular strength. In a 

number of the agencies, many 

SURS staff have been refocusing 

on quality improvement 

functions as opposed to the 

traditional fraud and abuse 

investigations. In some cases 

this has entailed transfers to new 

Pressing for Administrative Savings 

In reviewing the Governor’s Medicaid budget for Fiscal Year 

96/97 budget, the California Legislative Analyst’s Office 

recommended eliminating 48 field office positions and 

reducing the claims processing contract. These actions, it 

held, could save $3.3 million, and were justified because 

managed care expansion was contributing to a dectining feefor-service workload. 

The Governor’s Office successfully maintained that such 

reductions were premature for that year. However, in its 

Fiscal Year 97198 budget, it has proposed a reduction of $3.1 

million and 60 positions in Medicaid prior authorization staff 

because of the advance of managed care. 

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-forservice 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 State’s 

own situation varies from the synthesis observations we offer. 

TABLE 3 

EFFECT OF MANAGED CARE ON TRADITIONAL FEEFOR-SERVICE FUNCTIONS 

Function 

Third Party 

Liability (TPL) 

Surveillance and 

Utilization 

Review Systems 

ww 

Drug Utilization 

Review (DUR) 

Provider 

Relations 

Claims 

Processing 

Prior 

Authorization 

Extent of 

Effect 

Moderate to 

Substantial 

Moderate to 

Substantial. 

Moderate to 

Substantial. 

Moderate. 

Moderate. 

Minor. 

Nature of Effect 

TPL role typically passed on to health plans. Leading to reduction in 

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. 

Reductions in SURS exceptions and fee-for-service SURS staff. 

Refocusing on quality measurement and targeted studies. Decreased 

support for fee-for-service investigations. Little staff experience with 

managed care investigations. 

Most States give DUR role to health plans. DUR staff have little 

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. 

Transition process triggers increase in inquiries. Signs in some States 

of dysfunctional effects such as longer response times, less attention to 

proactive provider education, and even an undermining of staff service 

ethic. 

Programming changes to accommodate managed care enrollments, 

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. 

Minimal signs of drop-off in workload as aged, blind, and disabled 

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 feefor-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 agency’s 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 

agency’s 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 longterm 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 agency’s 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 lion’s 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-forservice 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 costeffective ways of pursuing third-party-liability in managed care environments. 

In regard to surveillance and utilization review subsystems (SURS), HCFA’s 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-forservice 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 HCFA’s 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-ofchoice 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 feefor-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 “carveouts” 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 California’s 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: Tennessee’s 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 carveouts; 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. It’s like stages of death. It’s like a corporate merger. It’s a 

rough transition. It’s 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 fourphase process to prepare the agency for the internal changes necessary to carry out 

expanded managed care responsibilities. It involved two retreats as well as consultantfacilitated 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 Oregon’s 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, California’s 

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,” (OEI07-95-00030), 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. 

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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 limitedrisk 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)). 

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