A Look at Medicaid and Managed Care

 By Fernando Trevino, PhD, MPH, Professor and Chairman,


Department of Public Health and Preventive Medicine, University of North Texas Health Science Center


Closing the Gap, The U.S. and U.K. Collaborate on Minority Health • March 1998


Medicaid is the publicly-funded health insurance program 

designed to care for the poor populations in the U.S. It is 

funded through state and federal funds and managed at 

the state level. 

Each state designates a single agency that is responsible for Medicaid program operations. The states determine eligibility of Medicaid 

applicants, determine provider qualifications, payment methods and 

levels, as well as negotiate contracts with managed care plans and other 

providers. The state also processes and pays medical claims, communicates with beneficiaries and oversees quality of care in facilities funded 

by Medicaid. 

For each state, the federal medical assistance percentage (FMAP) 

is calculated using a formula that relates state per capita income to 

national per capita income. Thus it is one measure of relative individual state poverty. The FMAP pays for medical services in Medicaid. 

The state share is the difference between FMAP and the total 

costs for Medicaid. Medicaid programs, poverty lines, and FMAP’s 

vary considerably from state to state. The percentage of Medicaid 

costs borne by the federal government varies from 50 percent in more 

affluent states to 79 percent in the poorest states, and averages 57 

percent nationwide. A state’s Medicaid plan must be in effect throughout the entire state. And the amount, duration, and scope of services 

must be equal among eligible groups. 

The U.S. Department of Health and Human Services may grant 

a waiver of these requirements under two broad categories: research 

and demonstration (1115 waivers) and freedom of choice (1915 

waivers). 

Medicaid operates as a vendor payment program, with payments 

made directly to providers by states. Payment levels are subject to 

conditions that all state Medicaid plans and agencies must satisfy. 

Payments must be sufficient to enlist enough providers to participate 

in the plan and ensure comparable services statewide. Participating 

providers must accept the Medicaid reimbursement as payment in 

full, and payments to providers must be consistent with efficiency, 

economy, and quality of care standards. 

Medicaid Managed Care 

Managed health care organizations integrate the delivery and 

financing of health care for their members. This integration changes 

the historical supply side (provider) incentives. The change in incentives forces the provider to bear part of the financial risk, and the 

organization has a strong incentive to cut costs, and reduce excessive 

care and efficiencies. At the same time, the goal is to improve quality. 

There exists bipartisan support for the concept that states should 

have the flexibility to enroll Medicaid beneficiaries in managed care 

plans. This support stems from the belief that managed care is a way 

to stem the rapid growth of Medicaid expenditures and state funds, 

and as a way to expand coverage to more uninsured people with low 

incomes. 

The health care system in the United States is thus moving from 

fee-for-service to capitation, where individual providers are merging 

into integrated delivery systems and managed care systems are vying 

for business in a newly-created price-sensitive market. 

Historically, for-profit corporations shunned the Medicaid market, leaving the job to nonprofit HMOs organized by charity hospitals, community clinics, and physicians working in poor neighborhoods. Now, with state Medicaid programs leaping into managed 

care, offering huge and potentially lucrative contracts, commercial 

plans are actively seeking this market. 

Medicaid is now attractive to managed care companies because it 

delivers a ready-made pool of enrollees that otherwise would take 

years of costly and uncertain marketing efforts to develop. With the 

instant market share that a Medicaid contract can provide, such companies enjoy important advantages in the scramble to build provider 

networks and compete for the more lucrative business of private purchasers. 

While it is clear that Medicaid is increasingly moving toward 

managed care, it is less clear how racial and ethnic minorities are being 

impacted. The limited research that has been conducted has found a 

positive impact on cost reduction, along with better access to care and 

higher levels of satisfaction when compared with conventional Medicaid beneficiaries. But what has not been researched is the quality and 

acceptability of care for minorities. Though the U.K. may have fewer 

financial access barriers for minority populations, this very issue— 

acceptability of services—must be addressed in both countries. 

Office of Minority Health Resource Center U.S. Department of Health and Human Services