United States General Accounting Office

GAO Report to the Chairman, Committee on

Labor and Human Resources, U.S.

Senate

May 1995 COMMUNITY HEALTH

CENTERS

Challenges in

Transitioning to

Prepaid Managed Care

GAO/HEHS-95-138

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-260900 

May 4, 1995

The Honorable Nancy L. Kassebaum

Chairman, Committee on Labor

 and Human Resources

United States Senate

Dear Madam Chairman:

The federal Community and Migrant Health Center program supports

access to care in medically underserved areas and serves over 7 million

people.1

 In fiscal year 1994, the Congress authorized $663 million for this

program to support about 627 grantee health centers. In addition to

medical services, these centers provide other services that facilitate health

care. These enabling services may include transportation, health

education, counseling, or translation services and linkages with other

social services.

Community health centers face a changing health care environment. One

of the most significant changes affecting these centers has been the move

by states to prepaid managed care delivery systems. States are using this

type of arrangement to increase access to and control the costs of their

Medicaid programs, which are a major source of funding for most health

centers. Under prepaid managed care, health care organizations are paid a

per capita amount each month to provide for contracted medical services.

In 1989, the Congress mandated that state Medicaid programs reimburse

health centers for the cost of services that the centers provide to their

beneficiaries. The more recent change from cost-based reimbursement to

a monthly per capita amount for health centers participating in prepaid

managed care has raised concerns about the ability of these centers to

continue to provide their communities with both medical and enabling

services.2

 Mindful of these concerns, we focused on the following

questions:

1

Medically underserved areas are designated by the Secretary of Health and Human Services (HHS)

based on the ratio of primary care physicians to population, the percentage of the population below

the federal poverty level, the percentage of the population 65 years old and older, and an area’s infant

mortality rate.

2

Some health centers are concerned that reimbursement under a discounted fee schedule will affect

their ability to provide services to their communities.

Page 1 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
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• Have centers in prepaid managed care been able to continue providing the

medical and enabling services needed in their communities without

threatening their financial position?

• What lessons can be learned from health center experiences in prepaid

managed care?

• How does the Bureau of Primary Health Care (BPHC) help centers prepare

for operating under prepaid managed care systems?

In conducting this work, we performed detailed reviews of 10 health

centers in four states—Arizona, Florida, Massachusetts, and

Pennsylvania—that have had Medicaid prepaid managed care programs

since the mid-1980s.3

 (See app. I for descriptive information on the 10

centers.) At each health center, we collected program and financial data

for fiscal years 1989 through 1993. We also interviewed health center and

state Medicaid program officials. In addition, we visited state Medicaid

offices and health centers in Tennessee and Washington to learn about

recent changes in their Medicaid programs and the responses of health

centers to these changes. We also interviewed BPHC officials with

responsibility for providing guidance and overseeing the Community and

Migrant Health Center Program. Appendix II contains a more detailed

discussion of our methodology. Our work was performed from

January 1994 to March 1995 in accordance with generally accepted

government auditing standards.

Results in Brief In response to the changing health care environment, an increasing

number of community health centers are participating in Medicaid prepaid

managed care arrangements. While centers continue to serve vulnerable

populations, prepaid managed care exposes the centers to significant

financial risks.

By 1993, almost one-half million community health center patients were

covered by prepaid Medicaid managed care arrangements, an increase of

55 percent from 1991. Capitation rates for primary care services provided

to patients at the 10 centers we visited ranged from $12 to $38 per patient

per month. This variation in capitation rates is related to differences in the

services covered under health plan contracts at each center.

Despite initial concerns that capitation and other features of managed care

would diminish health centers’ ability to provide services to vulnerable

3

Nine of the centers receive community health center grants and one receives both community and

migrant health center grants.

Page 2 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

populations, this was not the case at the 10 centers we reviewed. The

centers were able to continue to provide such services in part because

they receive other revenues to support them. All 10 health centers were

serving more patients and had increased the amount spent on maintaining

or expanding a variety of enabling services. Seven centers also increased

the amount spent on covering the uncompensated care of low-income

patients.

While maintaining or expanding their medical and enabling services, all 10

health centers also improved their overall financial positions to some

degree. Improvement was related to increases in revenues that were

greater than the centers’ overall expenses. Revenues came from a variety

of funding sources such as Ryan White Comprehensive AIDS Resource

Emergency Care Act grants and state grants. Although prepaid managed

care revenues are growing as a percentage of total health center revenues,

they did not always exceed expenses for prepaid enrollees. In fact, in 1993,

three centers reported losses of up to $124,000 from prepaid managed

care. Six centers fared better, reporting excess revenues up to $100,000

from prepaid managed care.

Even with improved overall financial positions, as indicated by increased

year-end fund balances, some health centers may be vulnerable to

financial difficulties. None of the 10 centers met BPHC’s suggested

benchmark of 60 days of cash on hand to cover operating expenses—they

ranged from less than 1 day to 31 days. Health centers may be especially

vulnerable financially if they have a sizable portion of total revenues from

Medicaid prepaid managed care, have capitation rates that do not fully

cover the cost of services, have assumed financial responsibility for

services other than primary care, or have relied heavily on other federal

and state funds to conduct center activities.

While participation in managed care does not currently appear to have

diminished centers’ ability to fulfill their mission, some of these centers

encountered serious difficulties when they initially entered into managed

care arrangements. These include low capitation rates; assumption of too

much financial risk; and a lack of managed care knowledge, expertise, and

information. In the case of an Arizona health center, problems in all these

areas led to insolvency and forced the center to cut back on its medical

and enabling services.

Consistent with its role of providing policy guidance and technical

assistance to health centers, the Department of Health and Human

Page 3 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Services’ (HHS) BPHC is encouraging centers to prepare for prepaid

managed care and offers training, consultation, and contract-review

services to grantees. Some of these services are offered in conjunction

with the centers’ national association. BPHC also has begun an Integrated

Service Network (ISN) Development Initiative to fund centers’ efforts to

develop delivery networks with other health care providers for managed

care operations.

Background Grants to states to develop community health centers were first authorized

by the federal government in the mid-1960s. By the early 1970s, about 100

health centers had been established by the Office of Economic

Opportunity (OEO). When OEO was phased out in the early 1970s, the

centers supported under this authority were transferred to the Public

Health Service (PHS). Since 1989, close to $3 billion has been awarded in

project grants to health centers. Project grants are authorized under

Sections 329 and 330 of the Public Health Service Act and are to be used

by health centers to provide primary health care and related services to

medically underserved communities.

BPHC sets policy and administers the Community and Migrant Health

Center program. BPHC is part of the Health Resources and Services

Administration (HRSA) under PHS. Ten regional PHS offices assist BPHC with

managing the program. The regional offices are primarily responsible for

monitoring the use of program funds by grantees.

Health Centers Provide

Medical and Enabling

Services to Underserved

Communities

In 1994, the Community and Migrant Health Center program offered

comprehensive primary health care services to about 7.1 million people

through 1,615 health care delivery sites in medically underserved areas.

Health centers are expected to target their services to those with the

greatest risk of going without needed medical care. About 44 percent of

health center patients are children under 19 years old and 30 percent are

women in their childbearing years. About 60 percent of health center

patients live in economically depressed areas and nearly 63 percent have

incomes below the federal poverty level.

A central feature of health centers is their governance structure. Local

community boards govern health centers and are expected to tailor health

center programs to the community they serve. In addition to

comprehensive primary care services and case management, centers are

Page 4 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

expected to offer enabling services.4 These services are determined from

assessments of community needs and are intended to help individuals

overcome barriers that could prevent them from getting needed services.

Health Centers Receive

Funding From Multiple

Sources

Health centers are supported by various funding streams. Community

health center project grants and Medicaid provide the two largest

components of health center revenues, respectively, 35 and 34 percent in

1994. Health centers may also receive other federal, state, and local grants

to support their activities.

While health centers are required to offer services to all individuals

regardless of their ability to pay, centers must seek reimbursement from

those who can pay as well as from third-party payers such Medicaid,

Medicare, and private insurance. Patient fees are set using a sliding fee

schedule that is tied to federal poverty levels. Patients with incomes below

a certain percentage of the federal poverty level receive free care or may

pay some portion—a discounted fee—while those in the highest income

levels pay fees that cover the full service charge. The difference between

service charges and the sliding fees collected is a measure of the amount

of low-income care subsidized by the center.

Recent Changes in

Financing and Health

Service Delivery Affect

Health Centers

Two major developments in recent years have affected the financial status

and, therefore, the viability of health centers. The first is the authorization

of a cost-based reimbursement system for health centers and the second is

centers’ participation in prepaid managed care. In the late 1980s, the

Congress recognized that neither Medicare nor Medicaid paid the full cost

for services provided to program beneficiaries at community health

centers. This was due to low reimbursement rates and because some

enabling services provided by health centers were not considered as

reimbursable benefits by Medicaid. As a result, health centers had fewer

financial resources to subsidize care for patients who could not pay and

for conducting other program activities. In recognition of this problem, the

Congress—as part of the Omnibus Budget Reconciliation Act of 1989

(OBRA 89)—created a new Medicaid and Medicare cost-based

reimbursement system for health centers. Under this system, both

programs were required to reimburse health centers for the reasonable

cost of medical and enabling services provided to their beneficiaries.

4

Case management services (including counseling, referral and follow-up services) are designed to

assist health center patients in establishing eligibility for and gaining access to federal, state, and local

programs that pay or provide for medical, social, educational, or related services.

Page 5 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

The second major development has been the move by states to managed

care delivery systems for their Medicaid programs to address rising costs

and access problems. Managed care in Medicaid is not a single health care

delivery plan but a continuum of models that share a common approach.

At one end of the continuum are prepaid or capitated models that pay

health organizations a per capita amount each month to provide or arrange

for all covered services. At the other end are primary care case

management (PCCM) models, which are similar to traditional fee-for-service

arrangements except that providers receive a per capita management fee

to coordinate a patient’s care in addition to reimbursement for the services

they provide. Both systems require that beneficiaries access care through

a primary care provider. Between June 1993 and June 1994, the total

number of Medicaid beneficiaries in managed care programs across the

country increased 57 percent, from almost 5 million to nearly 8 million,

with most of the growth occurring in fully capitated managed care

programs.

Health centers may not be as assured that capitated reimbursement will

cover their costs as they are under traditional Medicaid fee-for-service

systems. This becomes a concern when health centers lose their

cost-based reimbursement under Medicaid prepaid managed care

programs. Health plans that contract with centers reimburse them on the

basis of a negotiated per capita rate for a set of services. This capitation

rate must be sufficient to cover the cost of the contracted services for all

Medicaid health plan members enrolled at the health center. Incorrect

assumptions about the cost of individual services or the frequency with

which they are used may result in an inadequate capitation rate. If the rate

is too low, it can lead to financial losses for the centers.

States establishing managed care programs that require beneficiaries to

enroll in a Medicaid health plan must obtain one of two types of waivers

from the Health Care Financing Administration (HCFA). Section 1115 of the

Social Security Act offers authority to waive a broad range of Medicaid

requirements. Eight states have approved statewide 1115 waivers, and 12

others have waiver proposals pending with HCFA. A second type of waiver

is allowed by section 1915(b) of the Social Security Act. These waivers

allow states to carry out competitive programs by waiving specific

program requirements, such as a beneficiary’s choice of provider.

Currently, 37 states and the District of Columbia have 1915(b) waivers and

4 other states have pending waivers.

Page 6 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

The loss of cost-based reimbursement is a major concern for health

centers entering into prepaid capitated agreements. These health centers

are concerned that (1) the per capita monthly rate may not adequately

cover the costs of providing services to the most vulnerable populations

and (2) the lack of reimbursement by health plans for some medical,

enabling, or other health services may hinder their ability to continue to

provide them.5

Health Centers

Participating in

Managed Care

Continue to Provide

Medical and Enabling

Services to Their

Communities

Changes in the health care delivery environment are impacting community

health centers as more and more health centers participate in prepaid

managed care arrangements. In our review of 10 health centers, we found

that prepaid reimbursement for services provided to Medicaid patients did

not diminish the centers’ ability to provide access to care for their

patients. In fact, health centers have improved their overall financial

positions to some degree while maintaining or expanding medical and

enabling services. This is due to revenue increases from a variety of

sources, such as federal funding other than health center grants. Earnings

from prepaid managed care were modest and did not contribute

significantly to the support of enabling services and subsidized care. Some

center officials, however, credited the predictability of monthly capitation

payments as assisting them in financial planning. Using another measure

to determine financial vulnerability—cash balances—all 10 centers had

limited cash balances. For centers with more than 15 percent of their total

revenue from prepaid managed care, low cash balances could be a

problem if they encounter significant unexpected expenses resulting from

inadequate capitation rates or assumption of risk for nonprimary care

services.

Increasing Participation in

Prepaid Managed Care

In response to the changing health care environment, the number of health

centers accepting capitated payments for their Medicaid patients grew

from 92 health centers, with 280,000 prepaid patients in 1991, to 115

centers with nearly 435,000 prepaid patients in 1993.6

 Health centers often

feel pressure to enter into managed care arrangements when states

implement such programs on a mandatory or voluntary basis statewide.

Five of the 10 health centers we visited operate in areas where Medicaid

5

Because of concerns that the loss of cost-based reimbursement will lead to service cutbacks and

health center closures, the National Association of Community Health Centers has filed suit to stop

implementation of four approved section 1115 waivers as well as the approval of additional waivers.

6

While 1994 figures are not yet available, the BPHC believes they will likely show accelerating growth

in health center participation in prepaid managed care as more states implement mandatory Medicaid

managed care systems.

Page 7 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

beneficiaries are mandated to participate in prepaid managed care plans

under Medicaid waivers. Increasingly, health centers also choose to

participate in areas with voluntary programs. Whether mandatory or not,

health center participation is driven by the growing importance of the

Medicaid program to health center revenues. In 1993, Medicaid revenues

accounted for 17 percent to over 50 percent of health center revenues at

the centers we visited. In addition, between 1989 and 1993, 6 of the 10

health centers experienced an increase in the ratio of Medicaid revenues

to total revenues. At the same time, 9 health centers experienced a

decrease in the amount that federal community health center project

grants represented of total revenues.7 ,8 (See fig. 1.)

7

Some of these health centers have also increased the percentage of their revenues from other income

sources, such as state and local grants or other federal grants.

8

Except for Sunshine Health Center and Lynn Community Health Center, which received, respectively,

22 and 17 percent of their revenues in 1993 from other federal grants, contracts, or both, the remaining

health centers received less than 7 percent of their revenues directly from other federal grants.

Page 8 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

7

Some of these health centers have also increased the percentage of their revenues from other income

sources, such as state and local grants or other federal grants.

8

Except for Sunshine Health Center and Lynn Community Health Center, which received, respectively,

22 and 17 percent of their revenues in 1993 from other federal grants, contracts, or both, the remaining

health centers received less than 7 percent of their revenues directly from other federal grants.

Page 9 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Figure 1: Percentage of Health Center

Receipts, by Source Percent of Revenue

Economic

Opportunity

Family 

Sunshine

1993 1993

Lynn

Community

Great Brook 

Valley

1993

Roxbury

Comprehensive

Community 

Health Centers

Medicaid

Health Center Grants

Other

100

90

80

70

60

50

40

30

20

10

0

1989 1993 1989 1993 1989 1989 1989

7

Some of these health centers have also increased the percentage of their revenues from other income

sources, such as state and local grants or other federal grants.

8

Except for Sunshine Health Center and Lynn Community Health Center, which received, respectively,

22 and 17 percent of their revenues in 1993 from other federal grants, contracts, or both, the remaining

health centers received less than 7 percent of their revenues directly from other federal grants.

Page 10 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

El Rio

Santa Cruz 

Greater 

Philadelphia 

Health Action

Spectrum 

1989 1993 1989 1993 1989 1993

Mountain

Park 

1993

Clinica Adelante 

1989 1989 1993

The degree to which health centers were involved in prepaid managed

care varied considerably among the 10 health centers. In 1993, prepaid

managed care accounted for as little as 3 percent and as much as

52 percent of the total health center revenues (see fig. 2). Differences also

existed in the percentage that prepaid managed care revenues represented

of total Medicaid revenues, ranging from about 12 to 100 percent of total

Medicaid revenues among the 10 centers.

Page 11 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Figure 2: Medicaid Fee-For-Service

and Prepaid Managed Care Receipts Percent of Total Revenue

0

10

20

30

40

50

60

70

80

90

100

Economic Opportunity Family

Sunshine

Lynn Community

Great Brook Valley

Roxbury Comprehensive Community

Mountain Park

Clinica Adelante

El Rio Santa Cruz

Greater Philadelphia Health Action

Spectrum

Health Centers

Prepaid Medicaid

Medicaid Fee-for-Service

Typically, health centers participate in prepaid managed care through

health plans serving Medicaid beneficiaries. The health centers contract

with one or more health plans to provide a subset of health plan services.

Reimbursement for primary care services at the 10 health centers we

reviewed was paid as a monthly capitated rate.9

 The capitation rates for

primary care services ranged from $12 per member per month at one

health center to $38 per member per month at another. Rates varied in

large part because of the different services covered under health plan

contracts. For example, a center receiving a higher rate may provide

additional services, such as X rays and immunizations. If a center with a

9

While health centers can be reimbursed on either a capitated or fee-for-service basis, the most

common arrangement between health centers and health plans is a capitated payment for primary care

services only. Other arrangements exist; for example, one Medicaid health plan pays its primary care

providers, including health centers, on a discounted fee-for-service basis.

Page 12 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

lower rate provides these services to plan enrollees, it could receive

additional reimbursement on a fee-for-service basis. Some centers also

told us that they had received a higher rate because they had negotiated

for one with the health plan.

In addition to agreeing to provide primary care services, four health

centers have assumed financial responsibility for referrals, hospitalization,

or both in return for a higher capitation rate.10 In such arrangements, the

managed care plan withholds a portion of the health center’s primary care

capitation payment to cover referral or hospitalization costs that are

higher than expected. In some cases, if the funds withheld are insufficient

to cover the losses, the amount withheld in the future from health center

capitation payments can be increased.

Health Centers Are

Currently Able to Provide

Services to the

Underserved

Despite the concern that capitation would make it difficult for health

centers to maintain their service levels, we found that the 10 centers

continue to offer many services targeted to the needs of their communities

and that they have maintained the intensity and frequency of the services

provided. In addition to medical care, many of the health centers offer

transportation and translation services as well as health education,

acquired immunodeficiency syndrome (AIDS) case management, and early

intervention services for children of substance abusers. These enabling

services are very important in reducing the barriers to health care as well

as helping to address problems that can lead to the need for further

medical care. In addition, these services are available to all health center

patients including those whose benefit package may not cover the cost of

these services. (See fig. 3 for a list of the enabling services provided at

each health center.)

10Of these four, one health center shares this financial responsibility with the managed care plan.

Page 13 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Figure 3: Health Center Programs and Services

Programs and Services

Health Centers WIC Nutrition Program

Transportation

Translation

Health Education

Health Outreach Workers

Substance Abuse Counselors

AIDS Case Management

Violence Prevention

School-Based Services

Homeless Assistance

Outreach Workers

Social Workers

Child Care

HIV Testing and Counseling

Clinica Adelante

El Rio Santa Cruz

Neighborhood

Economic Opportunity Family

Greater Philadelphia

Health Action

Great Brook Valley

Lynn Community

Mountain Park

Roxbury Comprehensive

Community

Spectrum

Sunshine

Indicators of a health center’s ability to increase access to the community

it serves include growth in the number of patients served and in the

amount of funds spent on subsidizing low-income care. All the health

centers increased access to medical care. The number of medical patients

Page 14 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

served by the health centers increased from 131,000 to almost 169,000

from 1989 to 1993, with individual center increases ranging from 4 to

164 percent (see fig. 4). In addition, the number of patient visits or

encounters increased from 596,063 to 828,848 between 1989 and 1993 at

the 10 health centers.

Page 15 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Figure 4: Health Center Medical

Patients

0

5

10

15

20

25

30

45

50

55

60

Medical Patients (in thousands)

Economic


Opportunity 


Family

Sunshine

Lynn


Community

Great Brook Valley

Roxbury


Comprehensive


Community

Mountain Park

Clinica Adelante

El Rio


Santa Cruz

Greater Philadelphia

Spectrum

Health Centers

1989

1993

Page 16 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Between 1989 and 1993, 7 of the 10 health centers increased their spending

on subsidized low-income care; that is, the amount of spending for free

care and the remaining portion of care that uninsured low-income patients

are unable to cover (see fig. 5).

Page 17 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Figure 5: Subsidized Care for

Low-Income Patients

0

0.5

1.0

1.5

2.0

2.5

3.0

4.5

5.0

5.5

6.0

Dollars (in millions)

Economic


Opportunity 


Family

Sunshine

Lynn


Community

Great Brook Valley

Roxbury


Comprehensive


Community

Mountain Park

Clinica Adelante

El Rio


Santa Cruz

Greater Philadelphia

Spectrum

Health Centers

1989

1993

Page 18 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

We examined the growth of spending on enabling services in each health

center, another indicator of a health center’s ability to increase access to

care. We found that all 10 of the health centers had increased spending on

these services between 1989 and 1993 (see fig. 6). Further, health center

officials told us that enabling services were expanded or enhanced in

response to growing community needs. In addition, officials at all 10

centers reported that the intensity or frequency of services typically

provided at the center had not been reduced with prepaid managed care.

Figure 6: Spending on Enabling

Services Dollars in Millions

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Economic

Opportunity Family

Sunshine

Lynn Community

Great Brook Valley

Roxbury Comprehensive Community

Mountain Park

Clinica Adelante

El Rio Santa Cruz

Greater Philadelphia Health Action

Spectrum

Health Centers

1989

1993

While the amount of spending on enabling services and subsidized

low-income care generally increased among all health centers, these

amounts varied considerably from center to center as did the distribution

Page 19 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

of spending between enabling services and subsidized care of low-income

patients. In most cases the sum of spending on enabling services and

subsidized care exceeded revenues received from the Community and

Migrant Health Center program grant (see fig. 7).

Page 20 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Figure 7: Revenue From Health Center

Grants and Spending on Enabling

Services and Subsidized Care

Dollars in Millions

Economic

Opportunity

Family 

Sunshine Lynn

Community 

Great Brook 

Valley

Roxbury

Comprehensive

Community 

Health Centers

Subsidized Care 

Enabling Services

Health Center 

80

70

60

50

40

30

20

10

0

Page 21 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

.

.

.

.

.

El Rio

Santa Cruz

Greater 

Philadelphia

Health Action

Mountain Spectrum 

Park 

Clinica Adelante 

With more spending on enabling services, 9 of the 10 health centers

increased the number of full-time-equivalent staff involved in providing

services other than medical or dental. These included health education,

social services, and case management. Staff providing these services

included drivers for transportation services, outreach workers, dietary

technicians, and home health aides (see fig. 8).

Page 22 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
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Figure 8: Nonclinical

Full-Time-Equivalent Staff

Economic

Opportunity

Family 

Sunshine Lynn

Community 

Great Brook 

Valley

Roxbury

Comprehensive 

Community

1989

1993

Health Centers

60 Full-Time-Equivalents Staff

55

50

45

40

35

30

25

20

15

10

5

0

Page 23 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

.

El Rio

Santa Cruz 

Greater 

Philadelphia

Health Action

Mountain Spectrum 

Park 

Clinica Adelante 

Center officials told us that community needs largely influenced patterns

of spending on enabling services and to subsidize low-income care. For

example, the health centers that we visited in densely populated areas

spent more money on enabling services, which include social case

workers, than the other centers. The health centers in less populated areas

tended to subsidize low-income care to a greater extent. Officials also

reported that changing local community conditions—such as an increase

in drug abuse or AIDS—could affect the combination of enabling services

and subsidized care.

Health Centers Have

Improved Their Financial

Positions While

Maintaining Services

While maintaining or expanding their medical and enabling services, all

the health centers that we studied reported improved financial positions,

as indicated by increases in their year-end fund balances; that is, the

excess between a center’s assets and liabilities.11 One contributing factor

is an increase in total revenues. Among the 10 health centers, increases in

total revenues ranged from 35 percent to 142 percent between 1989 and

11Fund balance information was taken from health center financial statements. These statements may

be stand-alone for primary care services or consolidated with other operations of the community

health center. Health center assets may include property, plant, equipment, inventory, and receivables,

all of which may not be easily convertible to cash.

Page 24 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

1993. Three of the centers saw revenue increases of over 100 percent

during this period.

Improvement in fund balances results when increases in revenues from a

variety of sources are greater than a center’s expenses. Five centers had

increases in grants from other federal and state sources. For example, one

health center received $556,000 from a Ryan White AIDS grant in 1993.12 All

health centers, however, had increases in their Medicaid revenue between

1989 and 1993. Increases ranged from 12 percent at one center to over

1,000 percent at another.13 Medicaid prepaid managed care income also

contributed modestly to fund balance increases.

Prepaid Managed Care

Revenues Support Medical

Services but Play a Small

Role in Supporting Other

Services

Prepaid managed care earnings were modest at best and played a small

role in supporting enabling services and subsidized care. In 1993, three

centers reported losses of up to $124,000 from prepaid managed care.

Other funds offset these losses. During the same year, six centers reported

excess prepaid managed care revenues of up to $100,000 after paying the

cost of care for medical services and administrative expenses. One center

reported no excess revenues from prepaid managed care.

Officials at nine of the health centers told us that returns from managed

care had not contributed significantly to center support of enabling

services and subsidized care. At the tenth center, however, the director

told us that growth in managed care revenues had allowed the center to

increase its spending on subsidized care. Between 1989 and 1993, the

center’s health center grant funding remained level, while the amount of

spending on subsidized care grew from nearly $1.6 to $2.5 million revenues

from prepaid managed care contributed to the spending on subsidized

care. At the same time, the director noted that the federal health center

grant was indispensable to the center’s maintaining a steady level of

funding for enabling services and subsidized care. Officials from three

health centers told us that the predictability of monthly capitation

reimbursements allowed them to better manage center finances.

12The Ryan White Comprehensive AIDS Resource Emergency Act of 1990 (P.L. 101-381) was enacted to

improve the quality and availability of services for individuals and families with the human

immunodeficiency virus (HIV).

13The 1,000-percent increase at the one center was due to a combination of factors. Not only did the

center see a growth in its Medicaid population, it also began to receive a higher rate of reimbursement

for Medicaid patients as cost-based reimbursement was implemented.

Page 25 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

Despite Increases in Fund

Balances Some Centers

Are Vulnerable to

Unexpected Losses

Although all the health centers have increased their year-end fund

balances, some may be vulnerable to financial difficulties. While all 10

health centers had year-end fund balance increases, none of the centers

had cash on hand to cover more than 60 days of operating expenses.14

Cash on hand ranged from fewer than 1 day of operating expenses at 2

centers to 31 days’ worth at another. Three centers only had available cash

to cover fewer than 10 days of operating expenses.15

Cash reserves are important because they represent liquid assets that can

be used to pay for contractual obligations and unexpected expenses.

Funds for unexpected expenses are especially critical for health centers

with more than 15 percent of total revenues from prepaid managed care

arrangements and those that have accepted financial responsibility for

services other than primary care.16 For example, when centers take on risk

for medical care and hospitalization but more patients than expected

require costly treatment or extended hospitalization, losses could be

substantial. We found that seven centers received more than 15 percent of

their total revenue from prepaid managed care. The four centers that have

assumed financial responsibility for specialty referrals, hospitalization, or

both all had cash reserves of 31 or fewer days of operating expenses,

thereby making them vulnerable to financial difficulties.

Centers can also be financially vulnerable when capitation rates do not

fully cover the cost of the care they provide. Centers are faced with either

depleting their reserves or cutting back services. Several health center

directors told us that their capitated reimbursements are adequate to

cover the costs of medical services and some believed that their capitation

rate roughly equaled what they would receive from cost-based

14In 1992, the Congress amended sections 329 and 330 of the Public Health Service Act to allow health

centers to establish cash reserves. These reserves would be available to the grantees to cover

unexpected expenses, some of which could result from prepaid services. In June of 1994, BPHC issued

guidance to health centers on how to implement the 1992 amendments. However, BPHC did not

specify an amount of cash reserves that centers are required to maintain because centers differ in the

amount of revenue derived from prepaid managed care and in financial risk assumed by centers for

nonprimary care services. BPHC believes that a cash reserve equivalent to normal expenses for 60 to

90 days would be reasonable for centers assuming financial risk for primary care services. In addition,

BPHC believes that a much larger reserve would be required of centers assuming financial risk for

specialty and hospital services.

15Because our review of health centers was conducted for the period of 1989 through 1993, and the

BPHC guidance for establishing cash reserves was issued in mid-1994, none of the centers had

established such reserves. We compared the centers’ cash and investments that would be used to

establish a reserve. BPHC anticipates that these reserves will be established over a period of time

starting with the 1995 grant period.

16This is a BPHC-suggested benchmark.

Page 26 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

reimbursement. In most cases, however, center directors could not

provide us with data to substantiate their position.

Lessons Learned

From Health Center

Experience With

Prepaid Managed

Care

While the health centers we visited are now providing medical and

enabling services to their communities, some initially faced several

problems that are likely to confront other health centers as states expand

Medicaid managed care. First, health centers must determine whether not

participating in managed care arrangements will affect the number of

patients served or revenues needed for financial viability. Centers that do

participate may face financial problems if reimbursement is inadequate

and they accept too much financial risk or lack managed care skills.

Health Centers That Do

Not Participate in Prepaid

Managed Care Risk Losing

Patients

Directors of most of the health centers we visited felt compelled to enter

into agreements with Medicaid managed care plans to maintain their

Medicaid patient population and revenues. The Medicaid population is an

important component of the medically underserved population that health

centers are intended to serve. Health centers that do not have agreements

with Medicaid health plans can lose some or all of their Medicaid patients

and revenues, jeopardizing their continued operation. Because Medicaid

revenue is a large and growing part of most health centers’ funding, losing

this funding could be catastrophic.

In 1994, a health center in Washington state experienced severe financial

difficulties when its relationship with the only local Medicaid health plan

was discontinued.17 The structure of the health plan, which limits

membership to individual physicians, made it impossible for the health

center to contract directly with the plan. Rather, one physician employed

by the center contracted with the plan. When this physician resigned from

the center, its relationship with the plan ended. The center’s other

physicians were not acceptable to the health plan because of concerns

about the physicians’ admitting privileges at the local hospital and their

ability to guarantee 24-hour coverage or because the physicians were not

willing to contract with the plan.18 Because all Medicaid beneficiaries in

the health center’s service area were enrolled in this health plan, the

center lost 1,000 Medicaid patients when they were assigned to other

health plan providers. As a result, the center abruptly lost one-third of its

17Although we visited this center, we did not select it for detailed study because of its short tenure as a

federally funded community health center.

18Physicians joining this plan must accept financial responsibility for ensuring continued care of plan

members if the health plan becomes insolvent.

Page 27 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

patients and 17 percent of its revenue over a 7-month period. The center’s

director told us that without this revenue the center was not viable and

eventually would have to close. The center reestablished its relations with

this health plan when the physician returned and Medicaid patients are

being reassigned.

Also in 1994, health centers in another state, Tennessee, faced the loss of

Medicaid revenues if they did not participate in the TennCare program. As

a result, all the health centers in Tennessee participate in the TennCare

program despite their loss of cost-based reimbursement.19 Health centers

had no choice but to contract with the TennCare health plans, according

to the director of the Tennessee Primary Care Association, an association

of community health centers in Tennessee. Health centers felt compelled

to participate because the Medicaid population is an important part of the

health centers’ target population. In addition, without the Medicaid

revenue, health centers would not be able to continue to offer the range of

services they typically provide. Some center officials believed that centers

would have closed without this revenue.

Health Centers That Do

Participate May Incur

Financial Risks

While the 10 health centers we studied expanded their support for

enabling services between 1989 and 1993, the early experience of 3 of

these centers with managed care was problematic. Each reported initial

depletion of financial resources, and in one case a cutback in services

occurred as well as a reorganization due to bankruptcy. Early center

problems stemmed from

• inadequate capitation rates paid to health centers;

• assignment of more financial risk to health centers than they were capable

of managing; and

• a lack of managed care knowledge, expertise, and systems.

Low primary care capitation rates and assignment of financial risk for

referral services contributed to financial difficulties at two Philadelphia

health centers in 1987 and 1988, according to health center and BPHC

officials. Because the capitation rate did not fully cover the centers’

operating costs, the centers were forced to deplete their cash balances to

continue providing services. Both centers reported that they could not

negotiate higher rates or avoid accepting too much financial risk in part

because the Medicaid beneficiaries were all assigned to one health

19The National Association of Community Health Centers has sued the Secretary of HHS to invalidate

the section 1115 statewide waiver granted to Tennessee to implement a statewide Medicaid managed

care program.

Page 28 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

maintenance organization. This left the health centers in a poor position to

negotiate a higher capitation rate or different risk arrangements. Since that

time, competing health plans have been added to the Medicaid managed

care program. In addition, the health centers are more knowledgeable

about managed care arrangements. They no longer accept risk for services

that they do not provide and have negotiated more acceptable rates. After

one of the Philadelphia centers gained experience in tracking managed

care operations, it developed data in 1991 showing that the utilization

patterns of its health plan enrollees justified a higher capitation rate.

An Arizona health center also suffered financial difficulties once it entered

into Arizona’s Medicaid managed care program, established in 1982.

According to the center’s current director, capitation rates were

inadequate to cover the costs of serving patients in Arizona’s Medically

Needy/Medically Indigent eligibility category.20 In the early 1980s, the

center had accepted financial risk for all medical services, including

referrals and hospitalizations for its enrollees. Further, the center did not

have adequate information systems to manage the risk it had assumed or

adequate capital to absorb losses. Within 4 years the center became

insolvent and reorganized under chapter 11 of the Federal Bankruptcy

Code. It was forced to cut back on its medical and enabling services as it

reorganized through bankruptcy in 1986 after experiencing large managed

care losses. The health center has completed its restructuring and is now a

provider for several health plans. In addition, the health center no longer

accepts full financial risk for referrals or hospitalizations.

BPHC Provides

Assistance to Health

Centers Entering

Prepaid Managed

Care

The explosive growth in Medicaid managed care leaves many community

health centers with little choice about participating in these new

arrangements. However, health centers entering prepaid arrangements are

faced with a series of new activities, each of which they must manage well

to succeed. First, they must negotiate a contract that pays an adequate

capitation rate and does not expose them to undue risk or otherwise

hinder them. They must also perform the medical management functions

of a prepaid system. In addition, health centers must monitor their

financial positions under each managed care agreement, including any

liability for referral and hospital services. They must also develop and

maintain the information systems needed to support the above clinical and

financial management activities. BPHC has strongly encouraged health

centers to consider participating in managed care arrangements, while

20This is an eligibility category specific to Arizona’s program. Applicants are allowed to subtract the

previous years’ medical expenses from the applicants’ annual income. In 1992, the qualifying income

level after the spend-down was $3,200 for an individual.

Page 29 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

cautioning them of the dangers of accepting risk for services provided by

others. Further, BPHC is funding a number of activities to help health

centers become providers that can effectively operate in a managed care

system.

Recognizing that health centers require both specific and general

knowledge of managed care, BPHC cooperates with the National

Association of Community Health Centers to provide training and

technical assistance to grantees. Several training sessions are available to

BPHC grantees. Subjects include managed care basics, negotiating a

managed care contract, medical management, and rate setting. In 1994, 48

sessions in 35 states were provided, reaching over 1,500 individuals.

Technical assistance consists of intensive one-on-one consultations

between managed care experts and health center officials. During 1994, 65

health centers requested and received one-on-one technical consultations.

BPHC has also developed various publications for health centers to use as

self-assessment tools. These publications offer guidance on aspects of

managed care such as preparing for prepaid health services, negotiating

with managed care plans, and assessing the market area and internal

operations.

Realizing that health centers lack experience in negotiating contracts with

health plans, BPHC offers a contract-review service between centers and

health plans.21 These contracts are typically reviewed by outside

private-sector managed care specialists who provide written advice on

specific sections that could be revised more favorably for health centers.

In 1994, BPHC reviewed 45 contracts for approximately 30 health centers.

In addition to activities targeted toward individual health centers, BPHC

also assists centers in planning and initiating participation in managed

care arrangements through the ISN, established in 1994. These one-time

awards are to be used by health centers for planning and developing an

integrated delivery system with other providers that will ensure access for

the medically underserved. Approximately $6 million was awarded to 29

health centers in 1994.

One of the health centers we visited in Florida is using an ISN award to

develop a network of community health centers that can negotiate with

21Our review of health center contracts with managed care organizations showed that many left key

contractual elements (scope of services, access to accounting information, assignment of members,

and the like) unspecified or unclear.

Page 30 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

managed care plans. In Washington state, a health center received an ISN

award to help establish a statewide Medicaid managed care plan.

Conclusions As states move to prepaid managed care to control costs and improve

access for their Medicaid populations, the number of participating health

centers continues to grow. Medicaid prepaid managed care is not

incompatible with health centers’ mission of providing access to health

care for medically underserved populations. However, health centers face

substantial risks and challenges as they move into these arrangements.

Such arrangements require new knowledge, skills, and information

systems. Centers lacking this expertise face an uncertain future and those

in a vulnerable financial position are at even greater risk.

Today’s debate over possible changes in federal and state health

programs—including Medicaid and other health grant programs, important

funding streams for health centers, and the lack of available cash at all 10

centers—heightens the concern over the financial vulnerability of centers

participating in prepaid managed care. If this funding source continues to

grow as a percentage of total health center revenues, centers must face

building larger cash reserves while not compromising medical and

enabling services to the vulnerable populations that they serve.

Agency Comments HRSA and BPHC officials reviewed a draft of this report and considered it a

balanced presentation of the challenges facing community health centers

involved in Medicaid prepaid managed care arrangements. We also

incorporated their technical comments as appropriate.

Page 31 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
B-260900 

We are sending copies of this report to the Secretary of Health and Human

Services and other congressional committees. Copies will be made

available to others on request. If you or your staff have any questions

about this report, please call me at (202) 512-7119; Rose Marie Martinez,

Assistant Director, at (202) 512-7103; or Paul Alcocer at (312) 220-7615.

Other contributors to this report include Jean Chase, Nancy Donovan, and

Karen Penler.

Sincerely yours,

Mark V. Nadel

Associate Director

National and Public Health Issues

Page 32 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Page 33 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Contents

Letter 1

Appendix I 

Characteristics of

Community Health

Centers Visited

36

Arizona 36

Florida 37

Pennsylvania 38

Massachusetts 39

Appendix II 

Scope and

Methodology

41

Table Table II.1: Characteristics of Four State Programs 41

Figures Figure 1: Percentage of Health Center Receipts, by Source 10

Figure 2: Medicaid Fee-for-Service and Prepaid Managed Care

Receipts

12

Figure 3: Health Center Programs and Services 14

Figure 4: Health Center Medical Patients 16

Figure 5: Subsidized Care for Low-Income Patients 18

Figure 6: Spending on Enabling Services 19

Figure 7: Revenue from Health Center Grants and Spending on

Enabling Services and Subsidized Care

21

.

.

.

.

.

22

Figure 8: Nonclinical Full-Time-Equivalent Staff 23

. 24

Page 34 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Contents

Abbreviations

AIDS acquired immunodeficiency syndrome

BPHC Bureau of Primary Health Care

EOFHC Economic Opportunity Family Health Center

GPHA Greater Philadelphia Health Action, Inc.

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HIV human immunodeficiency virus

HRSA Health Resources and Services Administration

ISN Integrated Service Network

LCHC Lynn Community Health Center

MPHC Mountain Park Health Center

OEO Office of Economic Opportunity

OBRA 89 Omnibus Budget and Reconciliation Act of 1989

PCCM primary care case management

PHS Public Health Service

RoxComp Roxbury Comprehensive Community Health Center

Page 35 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Appendix I 

Characteristics of Community Health

Centers Visited

The health centers included in our review serve primarily minority

communities with serious health problems such as infectious diseases,

diabetes, cardiovascular disease, AIDS, and substance abuse. In addition to

these problems, many of the communities have infant mortality rates that

are higher than the national rate. Health center patients are generally poor

with incomes at or below 100 percent of the federal poverty level. At some

centers, over 90 percent of patients are at this poverty level. A large

percentage of the centers’ patients are covered by Medicaid but a

significant portion have no health insurance coverage.22 Listed by state,

the following health centers were included in our review:

Arizona

Mountain Park Health

Center

Founded in 1979, Mountain Park Health Center (MPHC) was formerly

known as Memorial Family Health Center and was part of Phoenix

Memorial Hospital. In 1987, MPHC became a community-organized primary

care center. The center operates in urban South Phoenix, described as the

“most multicultural community in Arizona.” Seventy-five percent of the

center’s patients are Hispanic and 18 percent are African American.23 AIDS

and infant mortality are among the health problems in South Phoenix,

where the infant mortality rate for African Americans is 17.3 per 1,000 live

births. Seventy-eight percent of the center’s patients are at or below the

poverty level. Sixty-eight percent have Medicaid coverage and 14 percent

are uninsured.

Clinica Adelante, Inc. This center’s rural-based service area consists of a main site in Surprise,

Arizona, and two other sites; one in Queen Creek and another at Gila

Bend. Eighty-eight percent of Clinica Adelante’s population is Hispanic.

Thirty-nine percent of the center’s patients are migrant and seasonal

farmworkers. Major health problems in the population covered by the

center include a lack of adequate prenatal care, inadequate postpartum

visits and newborn checks in the perinatal population; infectious diseases,

inadequate nutrition, and dental decay in the pediatric population; and

diabetes, hypertension, and cardiovascular disease in the adult population.

Twenty-nine percent of the center’s patients have Medicaid coverage and

22Demographic, economic, and insurance data are provided for 1992 in the case of three centers, for

1993 (four centers), and for 1994 (two centers).

23This racial/ethnic category may include blacks from Haiti, Jamaica, and other countries.

Page 36 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Appendix I 

Characteristics of Community Health

Centers Visited

67 percent of them have no insurance coverage at all. Eighty-five percent

are at or below the poverty level.

El Rio Santa Cruz

Neighborhood Health

Center, Inc.

Established 25 years ago, the El Rio health center consists of a main clinic

and seven satellite clinics that provide medical and other services to the

medically underserved in Tucson. With the majority of patients residing on

the south and west sides of Tucson, the significant geographical barriers to

health care access are isolation and the remoteness of these locations as

well as poor public transportation. The locations of other health care

facilities can be at a considerable distance from where most of the patients

reside. In addition, language and cultural differences characterize the

patients of the El Rio center. Almost one in seven households in the

center’s service area routinely uses a language other than English in the

home. Other factors exacerbating access to services are proximity to the

U.S. border with Mexico, a large undocumented population and a local and

transient homeless population.

The El Rio service area has a higher proportion of Hispanics to the total

population, 55 percent versus 23 percent. Twenty-two percent of other

center patients are white and 14 percent are American Indian.

Seventy-eight percent are at 100 percent or below the poverty level.

Forty-one percent of center patients have Medicaid coverage and

38 percent are uninsured.

Florida

Sunshine Health Center,

Inc.

Since 1964, Sunshine Health Center, Inc., has provided comprehensive

primary medical and dental services to migrant and urban poor residing in

Broward County, Florida. The Sunshine Health Center serves a patient

population of migrant and seasonal farm workers; emigrants from various

countries including Haiti, Jamaica, Puerto Rico, and Nicaragua; and

African Americans and whites, most of whom are the poor and the

working poor. Thirty-two percent of the center’s patients are white,

30 percent are African American, and 20 percent are Hispanic.

Located in a county that leads the United States in the increase in AIDS

patients, the center serves a population with high rates of infant mortality

and morbidity, sexually transmitted diseases, and chronic disorders such

Page 37 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Appendix I 

Characteristics of Community Health

Centers Visited

as hypertension and diabetes. Ninety-three percent of the patients of the

center are at or below the poverty level. Thirty-eight percent are Medicaid

patients and 58 percent have no insurance.

Economic Opportunity

Family Health Center

From its 1967 start in a trailer, the Economic Opportunity Family Health

Center (EOFHC) has evolved into its main center, six satellite centers, and

affiliated school outreach programs serving the north and northwest areas

of Dade County. Dade County has a large and rapidly growing AIDS

population, significant substance abuse problems, a large migratory

farmworker population, and minority populations with extremely high

incidence of tuberculosis, sexually transmitted diseases, and infectious

diseases. The population served by EOFHC is 70 percent African American

and 20 percent Hispanic. Sixty-six percent of center revenues are

generated primarily from the federal government.

Pennsylvania

Spectrum Health Center,

Inc.

This center began operations in 1967 to provide family planning and

general health services to women. Located in the West Park section of

Philadelphia, Pennsylvania, the center serves an area characterized by

high infant mortality, low birthweight, teenage pregnancy, and the spread

of sexually transmitted diseases including HIV infection. Ninety-nine

percent of Spectrum’s patients are African American and 90 percent of the

center’s patients are at or below the poverty level. Seventy-one percent of

center patients have Medicaid coverage and 27 percent have no insurance.

Greater Philadelphia

Health Action, Inc.

Greater Philadelphia Health Action, Inc. (GPHA) is targeted to provide

health care to Philadelphia’s medically underserved population. GPHA

operates five primary health care centers, a drug and alcohol counseling

and treatment program, a child care program, and two comprehensive

school-based clinics. Philadelphia’s health care problems include an infant

mortality rate of 14.2 deaths per 1,000 live births; an 11.7-percent

low-birth-weight rate; a high teen birth rate of 49 births per 1,000 females

(up from 46 per 1,000 in 1988); increasing rates of substance abuse,

especially among women; and increasing rates of HIV/AIDS. The vast

majority of patients are African American (73 percent) and have incomes

at or below 100 percent of the federal poverty level (88.5 percent).

Page 38 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Appendix I 

Characteristics of Community Health

Centers Visited

Seventy-three percent have Medicaid coverage and 22 percent are

uninsured.

Massachusetts

Lynn Community Health

Center

The Lynn Community Health Center (LCHC) was organized in 1971 as a

small storefront mental health center. It has grown into a comprehensive

care facility that is the largest provider of outpatient primary care in Lynn,

a city characterized by the center’s executive director as the most

medically underserved area in Massachusetts.

LCHC’s programs focus on people with the greatest barriers to care: the

poor, minorities, new immigrants, non-English speaking people, teens, and

the frail elderly. Sixty percent of the population served by the center do

not consider English to be their first language. At present, Spanish and

Russian are the most common languages spoken by the center’s patients.

Over 30 percent of LCHC’s staff is bilingual or multilingual and can provide

translation services in Spanish, Khmer, Vietnamese, Laotian, and Russian.

Forty-five percent of center patients are white, 35 percent are Hispanic,

and 11 percent are African American. Sixty-three percent are at or below

the poverty level. Fifty-six percent have Medicaid coverage and 31 percent

have no insurance.

Great Brook Valley Health

Center, Inc.

This center was founded in 1972 by a group of mothers living in

Worcester’s largest housing project—the Great Brook Valley and Curtis

Apartments. These women founded the center because they and their

children lacked access to primary care. The center has grown from

providing well-child care services to the residents of public housing

projects to a comprehensive health center serving the surrounding

neighborhood.

Special populations requiring services include the perinatal population (in

Worcester, rates in two areas—infant mortality and low-birth-weight

infants—have been above the state average for the past decade) and the

Spanish-speaking elderly population who are monolingual. In addition, the

HIV/AIDS epidemic is growing in Worcester, particularly among the minority

populations and among the estimated 4,000 injection drug users in the city.

Page 39 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Appendix I 

Characteristics of Community Health

Centers Visited

In addition, adolescents are exposed to high levels of stress, violence, and

depression.

The Hispanic community represents 76 percent of center patients.

Ninety-five percent of those using the center are at or below the poverty

level. Fifty-five percent are covered by Medicaid and 30 percent have no

insurance.

Roxbury Comprehensive

Community Health Center,

Inc.

Roxbury Comprehensive Community Health Center (RoxComp), established

in 1969 by a mother concerned about the lack of medical services in the

Roxbury community, is the largest community health center serving the

Roxbury and North Dorchester areas. Health status indicators for these

communities are higher than the national average. For example, the infant

mortality rate is twice the national average of 10.1 per 1,000 live births.

The area served by the center also exceeds the national average in deaths

from heart disease, cancer, stroke, pneumonia, influenza, cirrhosis,

homicide, suicide, and injuries. Approximately 20 percent of reported AIDS

cases in Boston come from this area. Substance abuse among patients 19

years old and younger and among pregnant women is a problem in the

area.

Residents served by the center are poor, with 91 percent at or below the

poverty level. Eighty-eight percent of center patients are African

American. Sixty-two percent have Medicaid coverage and 26 percent have

no insurance.

Page 40 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Appendix II 

Scope and Methodology

To examine how Medicaid prepaid managed care affected community

health centers’ ability to continue their mission of providing

community-based health care to underserved populations, we first

selected a nonrandom judgmental sample of states with a variety of

Medicaid managed care situations. The states included Arizona, Florida,

Massachusetts, and Pennsylvania, whose prepaid managed care programs

included (1) mandatory and voluntary enrollment of beneficiaries,

(2) statewide and more geographically limited programs, and (3) capitated

Medicaid programs implemented with and without waivers (see table II.1).

Table II.1: Characteristics of Four State

Programs

State

Mandatory

enrollment Statewide program Waiver type

Arizona Yes Yes Section 1115

Florida No No 1915(b)a

Massachusetts No No 1915(b)a

Pennsylvania Yes No 1915(b)

aThese waivers are for primary care case management model programs that do not involve

capitated payments.

In each state, we then visited selected health centers that had prepaid

managed care plans operating in their areas for at least 3 years and

gathered at least 5 years’ worth of audited financial statements. Program

data for the same period were obtained from health center responses to

the Bureau of Primary Care’s Common Reporting Requirements.24

To determine whether health centers were encountering financial

difficulties while engaged in prepaid managed care operations, we

compiled data on their financial positions. Specifically, we reviewed data

on year-end fund balances, which represent the excess between center

assets and their liabilities. In addition, we calculated the number of days of

operating expenses that cash balances could support.25

We analyzed program data in several different ways. To determine

whether health centers were maintaining access for underserved and

vulnerable populations, we compiled data on the number of patients

24We did not independently verify the data contained in these reports.

25Daily operating expenses were calculated by dividing total expenses as reported on annual financial

statements by 365 days as defined by generally accepted accounting principles. Cash available

included cash and investments such as certificates of deposit reported on annual financial statements.

The number of days of operating expenses covered by available cash was determined by dividing cash

balances by daily operating expenses.

Page 41 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
Appendix II 

Scope and Methodology

served and the number of patient encounters—a proxy measure for

patient visits. To determine whether health centers were continuing to

provide enabling services to their communities, we compiled data on

spending for other health and community services, including

transportation and translation services. In addition, we reviewed the

number of full-time-equivalent staff hired to provide these services. To

determine whether health centers were continuing to provide care to

indigent and low-income patients, we compiled data on the amount of

subsidized care. To determine whether health centers’ sources of funds

were changing under prepaid managed care, we compared these sources

to total receipt of funds.

We also conducted work in two states that have more recently begun

capitated Medicaid managed care programs—Tennessee and Washington.

Washington is making specific accommodations for health centers as it

implements its Healthy Options program and is helping the centers

establish their own Medicaid health plan. In contrast, Tennessee has so far

not made programmatic changes to accommodate health centers, such as

requiring their inclusion as providers.

At all the health centers we visited, we toured the facilities and

interviewed administrators. We also interviewed officials of health plans

operating in the area, some that contracted with health centers and some

that did not; state community health center associations; and state

Medicaid officials. We also interviewed BPHC, HRSA, and National

Association of Community Health Center officials.

Because we selected our sites judgmentally, our results do not necessarily

represent all health centers’ experience with prepaid managed care but

illustrate the kinds of issues faced by health centers in these systems.

Our work was performed between January 1994 and March 1995 in

accordance with generally accepted government auditing standards.

(108981) Page 42 GAO/HEHS-95-138 Medicaid Prepaid Managed Care
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