United States General Accounting Office

GAO Report to the Chairman and Ranking

Minority Member, Subcommittee on

Medicaid and Health Care for

Low-Income Families, Committee on

Finance, U.S. Senate

July 1996 MEDICAID MANAGED

CARE

Serving the Disabled

Challenges State

Programs

G O A

years

1921 - 1996

GAO/HEHS-96-136

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-271532 

July 31, 1996

The Honorable John H. Chafee

Chairman

The Honorable Bob Graham

Ranking Minority Member

Subcommittee on Medicaid and Health Care

 for Low-Income Families

Committee on Finance

United States Senate

This report, prepared at your request, describes state efforts to include disabled Medicaid

beneficiaries in prepaid managed care programs.

We are sending copies to the Secretary of Health and Human Services; the Administrator,

Health Care Financing Administration; and state Medicaid directors. We will also make copies

of this report available to others on request.

Please contact me at (202) 512-7114 if you or your staff have any questions. Major contributors

to the report are listed in appendix I.

William J. Scanlon

Director, Health Financing and Systems Issues
Executive Summary

Purpose Prepaid managed care plans, which deliver medical services for a fixed (or

“capitated”) per-person fee, are an increasingly common part of Medicaid,

the nation’s largest health care program for the poor. With their emphasis

on primary care, restricted access to specialists, and control of services,

prepaid plans are seen as a way to help control spiraling Medicaid costs,

which totaled $159 billion in fiscal year 1995. Thus far, states have

extended prepaid care largely to low-income families—about 30 million

individuals—but to few of the additional 6 million Medicaid beneficiaries

who are mentally or physically disabled. Managed care’s emphasis on

primary care and control of service use differs from the care needs of

disabled beneficiaries—many of whom need extensive services and access

to highly specialized providers, which in some cases are essential to

prevent death or further disability. However, because over one-third of all

Medicaid payments go for their care, greater attention is being focused on

whether disabled individuals can be integrated successfully into managed

care.

These efforts affect three key stakeholder groups: disabled beneficiaries,

who include a small number of very vulnerable individuals who may be

less able than others to effectively advocate on their own behalf for access

to needed services; the prepaid care plans, which are concerned about the

amount of financial risk involved in treating people with extensive medical

needs; and the states and federal government, which run Medicaid. The

Chairman and Ranking Minority Member of the Subcommittee on

Medicaid and Health Care for Low-Income Families, Senate Committee on

Finance, asked GAO to examine (1) the extent to which states are

implementing Medicaid prepaid managed care programs for disabled

beneficiaries and (2) the steps that have been taken to safeguard the

interests of all three stakeholder groups. GAO’s review of safeguards

focused on two areas—efforts to ensure quality of care and strategies for

setting rates and sharing financial risk.

Background Medicaid is funded jointly by the states and the federal government and

operated mainly by the states. It provided health care coverage for

40 million people in fiscal year 1995, about one in seven of whom was

disabled. Some categories of mildly disabled individuals have health care

costs that closely mirror those of the general population, but others, such

as those with cystic fibrosis or end-stage acquired immunodeficiency

syndrome (AIDS), have costs that are much higher.

Page 2 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Executive Summary

Medicaid has traditionally been a fee-for-service program, meaning that

doctors, hospitals, and other providers are paid based on the number and

type of services they provide. States have relatively wide latitude in

structuring Medicaid programs, including making prepaid care available to

those who wish to enroll. But states must obtain federal approval to

require prepaid plan enrollment or to restrict individuals to specific plans.

This approval is designed to help ensure that everyone who is eligible has

access to care.

Results in Brief Serving disabled beneficiaries through Medicaid managed care poses

complex, new challenges to the states. To date, few states have significant

experience with prepaid care for disabled Medicaid beneficiaries, many of

whom have chronic conditions that require ongoing and costly specialty

care. Of the six states that require some or all of their disabled population

to enroll in prepaid care, only one program is more than 3 years old.

Eleven others have voluntary programs enrolling a small percentage of

disabled beneficiaries. However, because of continued concern about cost

containment, 13 more states have submitted proposals to enroll disabled

beneficiaries in prepaid care, with 12 of them intending to make

enrollment mandatory.

One of the challenges for states is developing both the service networks

and the necessary assurances that the health care needs of disabled

beneficiaries are being met appropriately. However, about half of the

states tend to rely on mechanisms such as the freedom of disabled

individuals to disenroll from or switch prepaid plans or on their access to

the states’ and plans’ complaint and grievance systems to help ensure

quality of care. While analyses of patterns of disenrollment or complaints

can provide meaningful information, in the aggregate they may not be

sufficient to detect systemic deficiencies in care for disabled beneficiaries.

In contrast, states that either mandate enrollment or provide small,

voluntary programs focused exclusively on disabled beneficiaries tend to

be furthest along in developing assurances that appropriate, quality care is

available to them. Examples of such actions include requiring health plans

to designate advocates to help coordinate the services disabled

beneficiaries receive and to provide access to specialists specifically

trained in care for disabled individuals.

A second challenge for states is developing and administering a managed

care system for disabled beneficiaries that is financially sound. However,

few states have ventured beyond current rate-setting approaches that base

Page 3 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Executive Summary

capitation rates on average costs for large segments of statewide Medicaid

populations, such as families with children or disabled individuals.

However, within the disabled population some groups, such as

quadriplegics or AIDS patients, have substantially higher medical costs

(sometimes more than $50,000 in a given year), while others, such as

mildly disabled individuals, may have few or no additional costs beyond

those of the general population. The ability to identify individuals with

high-cost disabilities could lead managed care plans to try to avoid

enrolling them or to encourage them to disenroll by limiting services

inappropriately. The development of more appropriate rate-setting

approaches that link rates more closely to individuals’ likely costs is still in

the experimental stage. States are further along in adopting methods to

share the risk of losses experienced by plans that enroll a relatively large

number of high-cost individuals. For example, reinsurance programs are

the most common form of sharing such losses. A few states are adopting

an approach called a “risk corridor,” which limits the amount of profit that

health care plans can earn as well as the amount of loss they could face,

thereby reducing the incentive to inappropriately limit services or to avoid

enrolling high-cost individuals.

Principal Findings

Few States Have

Significant Experience

Arizona, Delaware, Oregon, Tennessee, Utah, and Virginia are the only

states requiring some or all of their disabled beneficiaries to participate in

prepaid care programs. These states enroll disabled beneficiaries in

prepaid managed care plans that also cover other types of Medicaid

recipients. Arizona’s program, established in 1982 and currently enrolling

more than 70,000 disabled, is the only mandatory program more than 3

years old. In contrast, Massachusetts, Ohio, Wisconsin, and the District of

Columbia have small-scale voluntary programs solely for disabled

individuals, none of which serves more than 3,000 beneficiaries. Seven

other states (California, Colorado, Florida, Maryland, Michigan, New

Jersey, and Pennsylvania), as well as Massachusetts, allow disabled

beneficiaries to enroll voluntarily in plans open to other Medicaid

beneficiaries. In these states, less than 20 percent of the disabled

population have chosen to enroll.

One problem identified thus far in states with federal approval to restrict

beneficiaries’ freedom to change providers has been coordinating

Page 4 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Executive Summary

enrollment for the estimated one-third of disabled individuals who are

“dually eligible” for health care under Medicaid and Medicare. Medicare

law guarantees these individuals more freedom in switching providers

than they have under Medicaid managed care programs, which require

prepaid plan enrollment. The few states wrestling directly with this issue

have taken varying approaches, ranging from adjusting their programs to

conform with Medicare requirements to seeking waivers of Medicare law

that would allow requirements closer to Medicaid’s.

Significant Efforts Needed

to Ensure Quality

States that rely on monitoring the services prepaid care plans provide to

the average enrollee may find that these efforts do not provide enough

specificity for assessing care received by disabled enrollees. For example,

problems in care provided to a very vulnerable disabled category, such as

quadriplegics, might escape general view because few if any cases of

quadriplegia would generally appear in random samples across the entire

population served by a health care plan. Most states recognize a need to

specifically monitor managed care for disabled enrollees and plan to do so

as they expand their programs.

Important aspects of states’ quality assurance activities can fall into two

main categories: (1) building safeguards into the programs through

adequate planning and consensus-building and (2) tailoring various

aspects of the program (such as enrollment and monitoring) to meet the

specific needs of disabled beneficiaries. To date, most of the efforts have

been made by several states with mandatory participation by disabled

individuals or by states with programs targeted exclusively to disabled

beneficiaries on a voluntary basis. The following are examples:

• Oregon’s Medicaid staff met weekly with health plans, advocates for

disabled individuals, and others for more than a year before the program

was implemented.

• Wisconsin requires the health plan serving participants in its targeted

prepaid care program, which serves only disabled beneficiaries, to have a

Medicaid advocate on staff who is knowledgeable about disabilities.

Wisconsin also mandates that case managers conduct needs assessments

within 55 days of enrollment in the plan.

• Massachusetts allows specialists to act as primary care providers and uses

a health needs assessment that assists enrollment staff in working with

beneficiaries to select a plan.

Page 5 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Executive Summary

Information about the services provided to disabled patients is essential

for effective monitoring. Since services are no longer paid for on a

fee-for-service basis, however, the reimbursement process no longer

produces this information. Developing comprehensive, consistent data on

services provided under prepaid care takes time and effort. To date, only

Arizona has substantial experience in doing so. The effort, which can be

expensive and time-consuming, can permit states to identify areas in

which service utilization rates are overly low or high. It can also allow

states to track movement of high-cost individuals among health plans, a

step that could help spot service delivery problems.

Experimentation Is Under

Way in Rate-Setting and

Risk-Sharing

Prepaid care capitation rates are normally based on average costs for

broad categories of beneficiaries, such as all disabled people in a state.

However, some categories of disabled individuals have very high costs,

while others have relatively low costs. Paying the same rate for groups

with different health care needs increases the risk that plans will seek to

enroll only the healthier, less expensive individuals. If plans feel financial

pressure from treating high-cost cases, they may also seek to limit

inappropriately the services these individuals receive. Three states

(Massachusetts, Missouri, and Ohio) are experimenting with ways to set

rates for disabled enrollees that more accurately reflect their varying

needs for care. For example, Ohio is exploring an approach that varies the

prepaid rate based on prior medical costs, with medical plans receiving

more money for people with demonstrated higher needs.

Most states that include disabled beneficiaries in prepaid care, and

especially those with mandated enrollment, provide some form of “safety

net” for plans that experience losses related to treating high-cost cases.

The most common form is called “reinsurance”—essentially an insurance

policy that plans can buy. Reinsurance is directed only at losses. Five

states (District of Columbia, Massachusetts, Ohio, Utah, and Wisconsin)

have implemented another type of arrangement, called a “risk corridor,”

that not only shares losses between the plan and the state but also

restricts how much of its capitation payments the plan can retain after

paying for enrollees’ health care needs. In Massachusetts, for example,

plans serving those who are severely disabled must return to the state any

profit that exceeds 10 percent of the capitation payments they received.

Under a risk corridor, a plan’s incentive to limit services inappropriately

and thereby increase the amount it may retain is reduced because such

amounts are limited to a maximum.

Page 6 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Executive Summary

Recommendations GAO is not making recommendations in this report.

Agency Comments GAO provided a draft of this report to the Administrator, Health Care

Financing Administration (HCFA), and to Medicaid officials from the 17

states in its study. In addition, GAO requested comments from several

independent experts in the fields of Medicaid and prepaid care for people

with disabilities. HCFA had no comments, while comments from states and

researchers were primarily technical or clarifying and were incorporated

as appropriate. Officials from one state commented that the draft seemed

to question the suitability of prepaid managed care for people with

disabilities. GAO believes, rather, that careful attention to program design

and implementation is needed when including this vulnerable population

in prepaid care, given their complex health care needs and the limited

experience to date with serving them in prepaid settings.

Page 7 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Contents

Executive Summary 2

Chapter 1 

Background

12

Disabled People Are One of Several Groups Eligible for Medicaid 13

Disabled People Account for Over One-Third of Medicaid

Expenditures

14

Managed Care Is Growing Throughout the Medicaid Program 15

Federal Requirements Govern State Use of Managed Care in

Medicaid

16

Applying Managed Care to Disabled Beneficiaries Poses

Additional Challenges

19

Objectives, Scope, and Methodology 20

Chapter 2 

States Are Moving

Toward Managed Care

for Disabled Medicaid

Recipients

22

17 States Have Medicaid Prepaid Managed Care Programs for

Disabled Beneficiaries

22

Most States Exclude the More Vulnerable From Managed Care 27

Enrollment of Dually Eligible Individuals Creates Challenges 29

More States Moving Toward Including Disabled Beneficiaries 32

Chapter 3 

Quality Assurance

Efforts Focused on

Care for Disabled

Beneficiaries Are

Concentrated in a

Handful of States

35

Adequate Planning and Consensus-Building 35

Tailoring Programs Specifically to Meet the Needs of Disabled

Beneficiaries

36

Programs Can Be Strengthened by Analysis of Encounter Data 45

Page 8 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Contents

Chapter 4 

Risk-Adjusted Rates

and Risk-Sharing Can

Help Reduce

Incentives to

Underserve Disabled

Beneficiaries

48

Traditional Rate-Setting Approach Does Not Address Negative

Incentives and Pressures

49

Risk Adjustment and Reinsurance Have Some Impact on

Incentives for Favorable Selection or Underservice

53

Risk Corridors Have Greatest Impact on Negative Financial

Incentives

59

Chapter 5 

Observations,

Conclusions, and

Comments

61

Appendix Appendix I: Major Contributors to This Report 66

Tables Table 1.1: Average Medicaid Per-Person Expenditures by

Beneficiary Group, 1993

15

Table 1.2: Comparison of Managed Care Flexibility Under

Program and Demonstration Waivers

18

Table 2.1: Enrollment of Disabled Beneficiaries in 17 State

Medicaid Prepaid Managed Care Programs, February 1996

24

Table 2.2: Description of Four State Prepaid Programs Designed

Specifically for Disabled Beneficiaries

26

Table 2.3: Extent to Which 17 States Include Severely Disabled

Beneficiaries in Medicaid Prepaid Care Programs, February 1996

28

Table 2.4: Examples of Barriers States Face in Including Dually

Eligible Beneficiaries in Medicaid Prepaid Managed Care

Programs

31

Table 2.5: Extent to Which 17 States Include Dually Eligible

Beneficiaries in Medicaid Prepaid Care Programs, February 1996

32

Table 2.6: Status of Additional Approved and Pending

Demonstration Waivers Including Disabled Beneficiaries as of

February 1996

33

Table 4.1: Missouri Sample Diagnostic Categories and Rate

Adjustments

55

Table 4.2: Oregon’s Reinsurance Levels and Rates, 1995-97 58

Page 9 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Contents

Table 4.3: Massachusetts Risk Corridors for Plan Providing

Prepaid Care to the Severely Disabled

59

Figures Figure 2.1: States With Prepaid Managed Care Plans for Disabled

Medicaid Beneficiaries, February 1996

23

Figure 4.1: Ohio’s Risk-Adjusted Capitation Rates and the

Percentage of Disabled Population at Each Rate

54

Figure 5.1: Key Approaches for Including Disabled Beneficiaries

in Medicaid Managed Care and Examples of State Initiatives

62

Abbreviations

AFDC Aid to Families With Dependent Children

AIDS acquired immunodeficiency syndrome

CMA Community Medical Alliance

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HIV human immunodeficiency virus

HMO health maintenance organization

ICF/MR intermediate care facility for the mentally retarded

IMD institution for mental diseases

NF nursing facility

SSI Supplemental Security Income

Page 10 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Page 11 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

Medicaid, a joint federal-state health financing program for the poor,

provided health care coverage for more than 40 million people in fiscal

year 1995. Medicaid expenditures—about $159 billion in fiscal year 

19951

—have more than tripled in the past 10 years. Under current

projections, they will double again within 8 years.

To help constrain rising costs, a number of states are making increased

use of prepaid managed care in their Medicaid programs. Under this

approach, a medical plan such as a health maintenance organization (HMO)

agrees to make a specified set of medical benefits available in exchange

for a prepaid amount of money per person. This approach is considered

less expensive than the traditional fee-for-service approach because it

eliminates the incentive to provide unnecessary or overly expensive

services in order to maximize revenues.

Thus far, most states have focused their Medicaid managed care efforts on

programs for low-income families, which accounted for about 73 percent

of Medicaid beneficiaries in fiscal year 1994. However, states are now

directing more attention to using managed care for another group of

Medicaid beneficiaries—those who are disabled. These individuals

constitute about 15 percent of all Medicaid beneficiaries, but because

many of them have a heavy need for specialized medical services, they

account for over one-third of all Medicaid expenditures.

For a number of reasons, such as their ongoing dependence on specialized

care and the wide diversity of types and severity of conditions, bringing

disabled people into managed care presents challenges that differ from

covering many other segments of the population. Dealing with these

challenges involves ensuring that adequate mechanisms are in place to

safeguard the interests of all three major stakeholder groups: the disabled

beneficiaries, who are concerned about adequate access to quality care;

the managed care plans, which are concerned about not assuming

inappropriate or excessive financial risk; and the states and federal

government, which are concerned about protecting the interests of both

beneficiaries and taxpayers. For the most part, this is new territory: Most

states have little or no experience in adjusting their managed care

programs to meet these specialized needs.

1

Amounts include both health services and administration for federal fiscal year 1995, which ended

Sept. 30, 1995.

Page 12 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

Disabled People Are

One of Several Groups

Eligible for Medicaid

The range of services provided under Medicaid varies from state to state.

Established in 1965 as title XIX of the Social Security Act (42 U.S.C.

1396-1396s), Medicaid programs are required under federal law to provide

eligible beneficiaries with certain primary, acute, and long-term care

benefits. Examples include physician services, hospital care, laboratory

services, preventive care for children, and nursing facility care. At their

option, states2

 may also elect to provide coverage for an array of other

services, such as prescription drugs, medical equipment, eyeglasses, dental

care, and ancillary services such as physical and speech therapy. Medicaid

is administered at the state level, with the Health Care Financing

Administration (HCFA) within the Department of Health and Human

Services (HHS) providing oversight and coordination at the federal level.

Those eligible for Medicaid come primarily from two cash assistance

programs: Aid to Families With Dependent Children (AFDC) and

Supplemental Security Income (SSI). AFDC is the primary route by which

children and their families become eligible, while elderly, blind, and

disabled individuals become eligible primarily through SSI. Coverage

expansions since 1984 have also increased the number of beneficiaries not

linked to cash assistance payments. These include people who are eligible

for Medicare, low-income children and pregnant women who are not

receiving AFDC, and several mandatory and optional coverage groups

among disabled and elderly individuals.

About 6 million disabled individuals were covered by Medicaid in fiscal

year 1994. To qualify for SSI—and therefore for Medicaid in most 

states3

—beneficiaries must meet certain program criteria for disability and

for maximum allowable financial resources. Eligibility criteria center on

an individual’s ability to function in daily life and the existence of a

disabling diagnosis or condition.4

 In 1996, the maximum allowable income

was $470 per month for an individual and $705 for a couple.5

 States have

2

Besides the 50 states, 6 other entities have programs: the District of Columbia, American Samoa,

Guam, the Northern Mariana Islands, Puerto Rico, and the Virgin Islands. For this report, we refer to

all 56 as “states.”

3

Eleven states elect to retain the more restrictive Medicaid eligibility criteria that were in place for

blind, disabled, and elderly beneficiaries before SSI was established in 1972. These states may use

more restrictive definitions of disability or more restrictive financial eligibility criteria than SSI.

4

Specifically, a disabled person is one who is unable to engage in any substantial gainful activity

because of a medically determined physical or mental impairment that is expected to result in death or

that has lasted (or can be expected to last) at least 12 months. Eligibility for children is based on

developmental delays and functional impairment.

5

Maximum financial assets exclusive of a home, automobile, burial space(s), and personal effects were

$2,000 for an individual and $3,000 for a couple.

Page 13 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

the option of extending eligibility to people who receive state payments

that supplement SSI benefits;6

 to some people whose incomes are above SSI

levels but who are sufficiently disabled to need institutional care; and,

with federal approval, to some people who are at risk of needing

institutional care. For 1996, the federally specified maximum income level

for an “SSI-related” individual was $1,410 per month.

More than half of all disabled people receiving SSI as of December 1994

were eligible on the basis of a mental disability. Such disabilities included

mental retardation, autism, schizophrenia, paranoia, and, under certain

circumstances, substance abuse.7

 For those who were eligible on the basis

of physical disabilities, the main categories were diseases of the nervous

system, sense organs,8

 musculoskeletal and connective tissues, or

circulatory system. Specific conditions in these categories included

blindness, muscular dystrophy, cerebral palsy, Parkinson’s syndrome,

brain tumors, rheumatoid arthritis, osteoporosis, and chronic heart

disease.

Children constitute about 22 percent of disabled SSI recipients. Among

them, mental retardation is the leading cause for eligibility. Since a 1990

U.S. Supreme Court decision,9 SSI disability criteria for those 18 and

younger have been based on developmental delays and limitations in

ability to engage in age-appropriate activities.

Disabled People

Account for Over

One-Third of Medicaid

Expenditures

Many disabled Medicaid beneficiaries have a level of medical need that is

atypical of the general population. A disabled person’s degree of disability

can range from mild to very severe. At the more severe levels, individuals

may be technology-dependent, requiring medical devices to compensate

for loss of a vital body function. Many of them also require ongoing

nursing care to avert death or further disability.

Because of their atypical medical needs, disabled individuals have medical

costs that are generally higher than those of the typical Medicaid

beneficiary. In fiscal year 1994, disabled individuals were about 15 percent

6

In some cases, states are required to provide supplemental payments. In February 1994, less than

0.1 percent of SSI recipients qualified for these required payments.

7

Drug or alcohol addiction by itself does not qualify an individual for SSI benefits. Rather, individuals

must be disabled (as defined by SSI law) with addiction as a factor contributing to the disability.

8

Because blindness is included among disabilities of the sense organs, throughout this report we will

refer to blind and disabled beneficiaries collectively as disabled.

9

Sullivan v. Zebley, 493 U.S. 521 (1990).

Page 14 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

of the Medicaid population and accounted for 39 percent of Medicaid

expenditures, including long-term care. Table 1.1 shows an Urban Institute

analysis of how expenditures for different services in 1993 were

distributed on a per-person basis. Average total expenditures for disabled

($7,956) and elderly individuals ($9,293) were each more than three times

the spending for other children and adults.

Table 1.1: Average Medicaid Per-Person Expenditures by Beneficiary Group, 1993

Primary and acute care

Beneficiary group Inpatient

Physician,

lab, X ray Outpatient Othera Total

Long-term

careb

All 

services

Disabled $2,072 $443 $773 $1,183 $4,471 $3,485 $7,956

Elderly 541 139 155 793 2,385c,d 6,907 9,293c

Other adults 805 381 304 313 2,041c,d 27 2,067c

Other children 452 159 165 203 1,116c,d 74 1,191c

Note: Some data on this table are estimates made by the Urban Institute to correct problems in

data reported to HCFA by states.

aIncludes prescription drugs, case management, family planning, dental, children’s preventive

services, vision, and other practitioner care (such as therapy).

bLong-term care includes institutional care, inpatient mental health care, and home health

services.

cTotals do not add because of rounding.

dTotals do not sum from the listed services because they include payments to Medicare and

prepaid health plans that cannot be assigned to specific services.

Source: Urban Institute calculations based on HCFA data.

Managed Care Is

Growing Throughout

the Medicaid Program

In general terms, managed care refers to a range of health care models that

use primary care practitioners to control and coordinate the delivery of

services. The best-known options are prepaid (or “capitated”) models that

involve payment of a set monthly amount per enrollee (the capitation fee)

to provide or arrange for a specified set of services.10 Faced with rising

Medicaid expenditures—the fastest-growing portion of most state

budgets—many states have begun to incorporate managed care into their

service delivery approach. Managed care is seen as a way to help control

these costs because it discourages providers from providing unnecessary

10Other managed-care options include primary care case management models, which are similar to

traditional fee-for-service arrangements except that providers generally receive a per capita case

management fee to coordinate the care for enrolled patients in addition to reimbursement for each

service they deliver.

Page 15 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

services and directs beneficiaries to obtain care in the most cost-effective

settings (for example, obtaining primary care at a clinic rather than a

hospital emergency room).

Managed care is also seen as a way to better ensure that Medicaid

beneficiaries have access to quality care. In theory, managed care

improves access and quality by linking individual beneficiaries with a

single provider responsible for coordinating their health care needs. Our

earlier review of these efforts found that the capitated managed care

programs were succeeding, at least to some degree, in providing the kinds

of benefits for which they had been designed. We found access to care was

slightly better than in traditional fee-for-services programs and quality was

about equal between the two.11

In June 1995, almost 15 percent of all those who received Medicaid

services were enrolled in prepaid managed care plans.12 Their numbers,

while still small in relationship to the total number of beneficiaries, are

growing swiftly. For example, from June 1993 to June 1995 enrollment in

capitated plans more than doubled, from 2.1 million to 5.3 million.

To date, most states have largely targeted their managed care

programs—particularly those that require enrollment in prepaid plans—to

children and adults who qualify for Medicaid through AFDC or other

programs, not toward elderly and disabled individuals. However, states are

increasingly including—or planning to include—disabled and aged

populations as well.

Federal Requirements

Govern State Use of

Managed Care in

Medicaid

A key feature of state Medicaid programs historically has been

beneficiaries’ freedom to choose from among participating providers.

While this freedom helped protect quality because beneficiaries who felt

the care they received was inadequate or inferior could simply change

providers, it did not guarantee that providers would be available to treat

them. Managed care approaches attempt to guarantee access to a provider

but often in exchange for some limitation on beneficiaries’ freedom of

choice. The extent to which state Medicaid managed care programs

restrict beneficiaries’ choice of providers determines, in part, whether

11Medicaid: States Turn to Managed Care to Improve Access and Control Costs (GAO/HRD-93-46,

Mar. 17, 1993).

12The percentage enrolled would be somewhat lower if calculated on the number of people eligible to

receive services rather than those who actually did. Data on the number of eligible people in fiscal year

1995 were not available.

Page 16 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

states will need to seek approval from HCFA to waive one or more

provisions of Medicaid law.

States have three options for using capitated managed care plans in their

Medicaid programs—one that requires no waiver of Medicaid statute and

two that do. Since the late 1960s, states have had the option—with no need

for a waiver—to contract with prepaid managed care plans to deliver

health care services to Medicaid beneficiaries, provided certain conditions

are met. One is voluntary enrollment: Beneficiaries must ordinarily be

permitted to disenroll at any time and return to the Medicaid

fee-for-service program.13 Other conditions relate to such matters as the

kinds of plans that can participate: They must be federally qualified or

state-certified HMOs,14 have a mix of enrollment that is no more than

75 percent Medicaid/Medicare enrollees, and engage in a range of quality

assurance activities.

The other options for using managed care exist under waiver authorities

granted to the Secretary of HHS. These authorities allow the Secretary to

waive certain statutory requirements—including the beneficiaries’

freedom to choose from among participating providers—so that a state

can develop alternative methods of service delivery or reimbursement.

These waivers are of two general types—program15 and demonstration.16

Table 1.2 compares various characteristics of the two types of waivers.

Although managed care approaches and mandated enrollment (that is, a

program that requires Medicaid participants to select among managed care

approaches) can be authorized under either type of waiver, waiving the

federal regulations concerning the types and enrollment mix of prepaid

organizations can only be done under a demonstration waiver.

13An exception exists for federally qualified HMOs and certain other federally designated

organizations. After a 1-month trial period has passed, states may restrict an enrollee’s ability to

disenroll for 5 months.

14A limited set of other organizations also qualify, such as certain types of federally designated

community health centers.

15Program waivers are of several types, all of which are authorized under section 1915 of the Social

Security Act.

16Demonstration waivers are also known as section 1115 waivers, after the portion of the Social

Security Act that authorizes them.

Page 17 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

Table 1.2: Comparison of Managed

Care Flexibility Under Program and

Demonstration Waivers

Program waivers Demonstration waivers

General characteristics

Allows for waiver of a limited set of Medicaid

requirements

Allows for waiver of nearly any provision in

Medicaid law

Approval is generally based on meeting

certain established conditions

Approval is based on the discretion of the

Secretary of HHS

Waivers can be renewed for 2- to 5-year

periods

Generally not renewablea

Generally used to establish primary care

case management programs and home and

community-based service programs

More recently used to establish broad

changes in Medicaid programs

Characteristics pertaining to prepaid managed care

Prepaid plans must still meet federal

requirement for 25% or more private

enrollment

Prepaid plans may enroll Medicaid

patients exclusively

Full range of mandatory services must be

offered

Benefit package may be modifiedb

Prepaid plan enrollment “lock-in” limited to 

1 monthc

Prepaid plan enrollment “lock-in” may be

extended to 12 months

No restrictions on access to family planning

providers

Access to family planning providers may

be restricted

aThe Congress has authorized renewal of some demonstration waivers.

bTo date, only Oregon has been permitted to modify the benefits package for traditional Medicaid

beneficiaries. Other states have been permitted to offer a modified package only to those newly

eligible for Medicaid coverage under the demonstration.

cLock-in is 6 months for prepaid plans meeting certain federal requirements.

The use of prepaid managed care to provide health care for disabled

beneficiaries is also affected by the statutory requirements of other

programs besides Medicaid. Specifically, because many disabled Medicaid

beneficiaries are simultaneously eligible for one or more other federal

programs—most notably Medicare17—state prepaid programs must

accommodate requirements of these other programs. The Medicare

statute, in particular, contains a number of provisions that cannot be

waived and that directly affect basic features of Medicaid prepaid care.

For example, the Medicare statute requires participating health plans to

have an enrollment mix with no more than 50 percent publicly insured

17Medicare, authorized by title XVIII of the Social Security Act, is a federal health insurance program

that covers most people aged 65 or older, all people who receive Social Security disability benefits for

24 months or more, and most people who suffer from kidney failure. Medicare consists of two parts:

part A, which covers inpatient hospital, skilled nursing care, home health, and hospice services, and

part B, which covers physician and a wide range of other services, including physical therapy.

Page 18 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

enrollees, in contrast to Medicaid’s allowance for up to 75 percent publicly

insured members.

Applying Managed

Care to Disabled

Beneficiaries Poses

Additional Challenges

Interest in using prepaid managed care programs for disabled Medicaid

beneficiaries has prompted concerns about whether this approach is

suitable to meet the needs of disabled beneficiaries. One positive

viewpoint is that disabled individuals have much to gain from managed

care because of its guarantee of access to a primary care practitioner and

its potential for coordinating an array of available services. Improved

access may particularly benefit segments of the disabled population that

have historically been unable to locate practitioners willing to serve them.

However, because prepaid plans typically emphasize primary care, limit

access to specialty care, and carefully control the utilization of services as

ways to control costs and manage care, they are potentially

disadvantageous to certain disabled beneficiaries because of their need for

extensive services and access to a range of highly specialized providers.

For example, compared with nondisabled children in the general

population, disabled children use twice as many physician visits and

prescribed medications and five times as many other services, such as

physical therapy. Among Medicaid children, the average per-person health

care costs in 1992 were seven times higher for disabled than for

nondisabled children. Other estimates place the per-person cost for

moderately disabled individuals at two to three times the cost for

nondisabled individuals.

The “medical necessity” standards within many prepaid plans are one

example of the potential problems that disabled individuals may face,

according to advocacy groups. While not unique to prepaid care, these

standards often call for “substantial improvement” or “restoration of

function” as conditions for recommending therapies or certain types of

medical equipment. However, many disabled people have conditions that

preclude making substantial improvement or restoring functions.

Advocacy groups worry that medical necessity standards may restrict

disabled people from receiving therapy or equipment when they need it

basically to maintain their existing level of functioning or to substitute for

lost functioning. Advocacy groups have also raised concerns about the

potential for managed care plans to disrupt the network of providers that

disabled persons have assembled over time.

Another concern that has been raised about using managed care for

disabled people is the potential effect on what could be called the

Page 19 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

“perverse incentives” inherent in a prepaid managed care approach.18

While incentives in a fee-for-service system may encourage a provider to

deliver too many services, prepaid programs may encourage health plans

to deliver fewer, or less expensive, services than enrollees need, such as

using a physical therapist skilled in sports medicine rather than in specific

disabilities such as spinal abnormalities.

Objectives, Scope,

and Methodology

The Chairman and Ranking Minority Member of the Subcommittee on

Medicaid and Health Care for Low-Income Families of the Senate

Committee on Finance asked us to examine (1) the extent to which states

are implementing prepaid Medicaid managed care for disabled

beneficiaries and (2) what steps states have taken to safeguard the

interests of the three major stakeholder groups—disabled beneficiaries,

prepaid health care plans, and the government—with a focus on quality

assurance and rate-setting mechanisms. On the basis of discussions with

subcommittee staff, we focused our review on the delivery of primary and

acute medical services. We also focused our work on prepaid managed

care programs—thus excluding those types of managed care that are not

risk based—because prepayment has the potential to result in

underservice to enrolled members.

To identify states with Medicaid managed care programs for disabled

beneficiaries, we reviewed HCFA documentation and interviewed national

Medicaid experts, including officials at organizations such as the National

Academy for State Health Policy and the Medicaid Working Group. From

the 17 states identified as having Medicaid prepaid managed care

programs for their disabled population,19 we obtained information on a

wide range of topics, including quality-monitoring activities and

rate-setting methodologies. We interviewed officials in these states to

obtain their views on problems they had encountered serving disabled

individuals in prepaid managed care plans and ways they had gone about

solving them.

On the basis of what we learned about the states as a whole, we selected

three states—Arizona, Oregon, and Massachusetts—for additional study.

Arizona and Oregon have relatively long-standing programs that provide a

18Under prepaid managed care, plans are at financial risk—that is, they must cover losses if the cost of

providing services to enrollees exceeds the amount received in capitation fees. Conversely, they may

keep the excess if the cost of providing services is less than the amount received in capitation.

19The 17 states are Arizona, California, Colorado, Delaware, the District of Columbia, Florida,

Maryland, Massachusetts, Michigan, New Jersey, Ohio, Oregon, Pennsylvania, Tennessee, Utah,

Virginia, and Wisconsin.

Page 20 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 1 

Background

degree of operational experience generally not present in other states.

Massachusetts has administered for almost 5 years a targeted program for

severely incapacitated adults that has served as a model for other state

experiments. Our work in these three states included interviewing

Medicaid and other state officials, selected providers, and advocacy

groups. We obtained and analyzed data provided by the three states, and

where they were available, we reviewed existing federal, state, and

independent studies of the programs.

During our review, we also interviewed other researchers and

knowledgeable officials and reviewed available studies of managed care

programs for disabled persons. We performed our work for this study

between November 1995 and May 1996 in accordance with generally

accepted government auditing standards.

Page 21 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care for

Disabled Medicaid Recipients

Of the 17 states that enrolled some portion of their disabled Medicaid

beneficiaries in prepaid managed care plans, enrollment ranged from less

than 1 percent to all of a state’s disabled beneficiaries. Six states have

programs that are mandatory for some or all disabled beneficiaries. Of the

remaining 11 states, 3 operate small-scale, voluntary programs focused

specifically on disabled beneficiaries; 7 allow disabled beneficiaries to

participate voluntarily wherever prepaid plans for the general Medicaid

population are available; and 1 does both.

Thirteen states exclude one or both of their more vulnerable disabled

populations—those in institutional care and those receiving home and

community-based long-term care—from prepaid plan enrollment.

However, under certain circumstances, all 17 states include one or more

groups of “dually eligible” beneficiaries, who are simultaneously eligible

for Medicaid and another federally funded program, such as Medicare.

Coordinating enrollment and other requirements for this dually eligible

group is difficult, according to state officials.

In addition to the 17 states currently enrolling disabled beneficiaries, more

states have plans under way to include them in prepaid managed care.

Specifically, 10 additional states have waiver proposals either approved or

pending; three of these are for pilot programs to gain experience with the

approach.

17 States Have

Medicaid Prepaid

Managed Care

Programs for Disabled

Beneficiaries

As of February 1996, 17 states have implemented prepaid managed care

programs for disabled Medicaid beneficiaries (see fig. 2.1). Six of 17

mandate prepaid plan enrollment for most or all of their disabled Medicaid

beneficiaries. Three states designed small-scale programs specifically for

disabled individuals in which participation is voluntary. In seven states,

disabled beneficiaries may voluntarily enroll wherever prepaid health care

plans are available for the general Medicaid population. The remaining

state operates both a small-scale program for disabled individuals and

allows beneficiaries to enroll wherever plans are available.

Page 22 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care

for Disabled Medicaid Recipients

Figure 2.1: States With Prepaid Managed Care Plans for Disabled Medicaid Beneficiaries, February 1996

No Program 

Voluntary Enrollment in Prepaid Program 

Mandatory Enrollment in Prepaid Program 

Note: Washington, D.C. (not pictured), has implemented a targeted voluntary program.

Table 2.1 shows the available comparative data on enrollment for these

programs. Limitations in reporting formats preclude comparisons for two

Page 23 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care

for Disabled Medicaid Recipients

states.20 For the five mandatory programs with available data—Arizona,

Oregon, Tennessee, Utah, and Virginia—participation ranged from 15.2 to

100 percent of all disabled Medicaid beneficiaries. Participation by eligible

beneficiaries in the voluntary programs targeted exclusively to disabled

individuals ranged from less than 1 percent to almost 11 percent, and

participation in the remaining voluntary programs ranged from 3 to

20 percent.

Table 2.1: Enrollment of Disabled

Beneficiaries in 17 State Medicaid

Prepaid Managed Care Programs,

February 1996

Disabled Medicaid beneficiaries

State

Total

disabled

eligibles

Total

enrolled in

prepaid

program

Percentage

enrolled in

prepaid

program

Year

enrollment

by

disabled

began

Mandatory programs

Arizona 64,456 56,775 88.0a 1982

Delaware 12,198 N/A N/A 1996

Oregonb 39,906 28,423 71.2 1995

Tennessee 138,931 138,931 100.0 1994

Utahc 17,155 8,158d 47.6 1982

Virginia 91,082 13,817d 15.2 1995

Voluntary programs targeted only to disabled individuals

District of Columbia 3,200e 8 0.25f 1996

Ohio 36,000e,g 294 0.82h 1995

Wisconsin 22,041e,i 2,404 10.9 1994

Voluntary programs for the general Medicaid population

California 770,067 28,262j 3.7 1972

Colorado 45,042 8,842 19.6 1974

Florida N/A N/A N/A 1981

Maryland 83,350 10,496 12.6 1975

Michigan 234,517 42,373 18.1 1972

New Jersey 143,793 4,226 2.9 1983

Pennsylvania 247,902 50,443 20.4 1972

Voluntary program targeted to disabled individuals and voluntary program for the

general Medicaid population

Massachusetts 164,366 7,935 4.8 1992

(Table notes on next page)

20These two states—Delaware and Florida—do not disaggregate SSI and related categories to

distinguish among aged, blind, and disabled beneficiaries.

Page 24 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care

for Disabled Medicaid Recipients

Note: N/A means the state does not distinguish in enrollment and/or eligibility reports the

categories of SSI and related beneficiaries that include aged and disabled.

aMedicaid eligible individuals not enrolled in a prepaid plan are Native Americans who live on

reservations and who elected to receive care from an Indian Health Service facility.

bOregon allows disabled beneficiaries, under certain conditions, to receive services in managed

or nonmanaged fee-for-service settings.

cIn 1995, the Utah program became mandatory in urban areas only. Enrollment of disabled

beneficiaries in the urban areas was phased in and should be completed by July 1996.

dEnrollment figures include both mandatory and voluntary participants.

eNumbers reflect those eligible to participate in the targeted programs. See table 2.2 for more

detail about which disabled beneficiaries may enroll in each program.

f

Enrollment began in February 1996. As of March 1996, 180 children were enrolled.

gProgram is limited to three counties.

hEnrollment began in one county in May 1995, another in June 1995, and the remaining county in

September 1995. March enrollment for the three counties totaled 355.

i

Program is limited to one county and enrollment is capped at 3,000, making current enrollment

80 percent of capacity.

j

Enrollment figures are somewhat understated because data from one county do not distinguish

between enrollment in prepaid and primary care case management providers.

Sources: State enrollment and eligibility reports for February 1996.

Table 2.2 describes some basic features of the four state programs

designed for disabled beneficiaries. Two states—Ohio and

Wisconsin—began these specialized programs in selected urban

communities to gain experience before expanding their programs

statewide. The District of Columbia’s program is available to all eligible

disabled children who live in the District. The fourth

state—Massachusetts—administers a prepaid program to care for severely

disabled beneficiaries but also allows disabled beneficiaries statewide to

enroll in prepaid plans.21

21Two of the four states also have an approved or pending demonstration waiver that would require

some or all disabled beneficiaries to participate in prepaid managed care. The District’s program,

which is an approved demonstration, is voluntary.

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for Disabled Medicaid Recipients

Table 2.2: Description of Four State Prepaid Programs Designed Specifically for Disabled Beneficiaries

State Program name and description

District of Columbia The Managed Care System for Disabled Special Needs Children is designed to reduce barriers to care

faced by disabled children and their families. Begun in February 1996, the program contracts with a

single nonprofit managed care plan to serve disabled people 22 and younger and is designed to move

them, whenever possible, from institutions into community settings. Each enrolled child is assigned a

primary care practitioner—usually his or her current provider—and a case manager who develops an

individualized plan of care through a face-to-face assessment and helps coordinate needed medical

and social services, including transportation and home adaptation. Enrollment will be phased in over 6

months with the goal of serving a total of about 3,000 within 2 years. Participation is voluntary and

enrollees may change primary care practitioners at any time. One goal of the program is to build a

comprehensive database profiling each enrollee to determine if caring for children with complex

medical needs can be improved through managed care.

Massachusetts Massachusetts contracts with three prepaid plans that focus on care of people with severe physical

disabilities or end-stage AIDS. Combined enrollment in any given month is about 300. The program

began in 1992 with a single health plan—now called the Community Medical Alliance (CMA)—which

coupled primary care with enhanced home visits and case management. Severely disabled enrollees

are screened for each of the following criteria: permanent triplegia or quadriplegia; a need for personal

care or other equivalent assistance to maintain independent living; and one of several specified

diagnoses, such as spinal cord injury, cerebral palsy, or end-stage muscular dystrophy. AIDS enrollees

must meet the clinical criteria of end-stage AIDS. At CMA medical care is provided by a clinical team of

physicians and nurse practitioners, with each patient assigned to a nurse practitioner. Care is provided

in the most appropriate setting—most often the patient’s home—as an alternative to specialty and

hospital care.

Ohio The Accessing Better Care program began enrolling physically disabled and chronically ill beneficiaries

under age 65 in three metropolitan areas in 1995. It offers a flexible benefits package that includes

home and community-based care as alternatives to institutional care whenever possible and currently

enrolls about 300 of the 36,000 eligible beneficiaries. Each area has its own prepaid health care plan,

which is a partnership between an HMO and an academic medical center. Care is delivered by an

interdisciplinary care team led by a social worker or nurse case manager. Individual care plans for each

enrollee are developed from initial assessments. Specialists play active roles on the care teams.

Wisconsin Designed for disabled beneficiaries over the age of 15, I-Care began operation in 1994 and is a joint

venture between a rehabilitation center and an HMO. It currently operates in one metropolitan county

and will eventually serve 3,000 beneficiaries. Care coordinators assess initial medical and social needs

through an in-home visit, develop an individual care plan jointly with providers and social workers, and

assist beneficiaries and their families in selecting and accessing providers. Care coordinators are

nurses or social workers knowledgeable about disabilities. All prepaid plan staff are trained in working

with people with disabilities. Beneficiaries may select from clinic sites throughout the city. Whenever

possible, enrollees’ existing primary care practitioners are invited to join the provider panel. Wisconsin

hopes to expand the program to two additional counties in 1997.

Six states—Arizona, Delaware, Oregon, Tennessee, Utah, and

Virginia—mandate prepaid plan enrollment for some or all of their

disabled beneficiaries.

• Arizona, Delaware, Oregon, and Tennessee mandate prepaid enrollment

under demonstration waivers for all Medicaid beneficiaries. Oregon allows

beneficiaries, in concert with their social service case workers, to select

fee-for-service care (either managed—called primary care case

Page 26 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care

for Disabled Medicaid Recipients

management—or nonmanaged) when prepaid care does not best meet

their health care needs. As a result, enrollment of disabled beneficiaries in

Oregon is about 71 percent, compared with 100 percent in Tennessee.22 In

Arizona, Native Americans who live on reservations may elect to receive

health care from either a prepaid plan or Indian Health Service facilities.

• Utah and Virginia mandate prepaid enrollment in selected areas under the

program waivers they received from HCFA.

The extent to which these six states with mandatory enrollment adapt

their managed care programs specifically for disabled beneficiaries is

further discussed in chapters 3 and 4.

Most States Exclude

the More Vulnerable

From Managed Care

Medicaid covers care for two types of more severely disabled

individuals—those in institutional care23 and those receiving home and

community-based long-term care.24 People meeting these criteria are at

least partially unable to care for themselves because of an injury, illness,

or other disabling condition. The range of services they need extends

beyond primary and acute medical care to include assistance with

everyday activities, such as dressing and using the bathroom, that the

individual cannot do independently because of his or her disability. Such

services include personal care attendants, homemaker services, adult day

care, and respite for family caregivers.

Thirteen of the 17 states exclude one or both of these vulnerable

populations (see table 2.3). More specifically, 12 exclude disabled

beneficiaries who reside in institutions, and 10 exclude those receiving

home and community-based long-term care. Under demonstration waivers,

two states—Arizona and Tennessee—mandate prepaid plan enrollment of

these populations for their primary and acute care needs but provide

long-term care under separate arrangements. Specifically, long-term care

in Tennessee remains fee-for-service and in Arizona is coordinated by a

single contractor—typically a state or county agency—for each county. In

Oregon, residents of institutions for the mentally retarded and the

22Demonstration waivers allow states the flexibility to determine health care delivery systems for

specified beneficiaries, including giving some a range of managed care alternatives while keeping

others in fee-for-service care. Consequently, a state with “mandatory” prepaid enrollment may have

certain beneficiaries in other settings. For example, Oregon designated primary care case management

as an acceptable managed care alternative.

23Institutional care in Medicaid refers to care delivered in nursing facilities, intermediate care facilities

for the mentally retarded (called ICF/MR), and, more limitedly, in institutions for those with mental

diseases.

24Home and community-based care is made available, with HCFA approval, to Medicaid beneficiaries

who, in the absence of such services, would be likely to require care in a Medicaid-covered institution.

Page 27 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care

for Disabled Medicaid Recipients

mentally ill are not enrolled in prepaid plans, while nursing home residents

are.

Table 2.3: Extent to Which 17 States

Include Severely Disabled

Beneficiaries in Medicaid Prepaid Care

Programs, February 1996 State

Institutional populations

included?a

Home and

community-based

services participants

included?b

Mandatory programs

Arizona NF, ICF/MR, IMD Yes

Delaware No No

Oregon NF Yes

Tennessee NF, ICF/MR, IMD Yes

Utah No Yes

Virginia No No

Voluntary programs targeted only to disabled individuals

District of Columbia NF, ICF/MR No

Ohio No No

Wisconsin No No

Voluntary programs for the general Medicaid population

California No No

Colorado NF Yes

Florida No No

Maryland No No

Michigan No No

New Jersey No No

Pennsylvania No Yes

Voluntary program targeted to disabled individuals and voluntary program for the

general Medicaid population

Massachusetts No Yes

aInstitutionalized beneficiaries include residents of nursing facilities (NF), intermediate care

facilities for the mentally retarded (ICF/MR), and institutions for mental diseases (IMD).

bHome and community-based services programs provide a broad range of services to

beneficiaries who, in the absence of such services, would require care in Medicaid-covered

institutions. Beneficiaries these programs serve include disabled people who might need care in

a nursing facility and those who are developmentally disabled or mentally retarded who might

need care in an ICF/MR.

Page 28 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care

for Disabled Medicaid Recipients

Of the 17 states, only the District of Columbia includes long-term care in

the set of services covered by capitation payments to health plans.25

However, a few such programs have existed on a small scale since the

1980s, and HCFA is currently reviewing Colorado’s request to implement a

pilot program in one county. Integrating primary and acute care into a

single prepaid contract with long-term care presents certain challenges.

Among them are the lack of generally accepted standards regarding the

use of various long-term care services; prepaid plans’ lack of experience

providing long-term care; the potential for the demise of existing

community-based providers with experience in delivering such care; and

the difficulty in establishing adequate rates for the combined set of

services. Concerns about integrating the two types of care include the

potential for medically based prepaid plans to emphasize medical

technology or institutional care over the social and supportive services

that many beneficiaries prefer. In addition, integration raises concerns

about who should perform care needs assessments and case management

services—state or prepaid plan staff—given the lack of recognized

standards for appropriate long-term care and the fact that in such

integrated arrangements a single provider is responsible for major

portions of an individual’s life needs.

Enrollment of Dually

Eligible Individuals

Creates Challenges

Another consideration for states with Medicaid managed care initiatives is

whether to include beneficiaries who are also eligible for medical services

or supplies through another federal program. For Medicaid beneficiaries,

these programs fall into two categories—Medicare and title V and related

school-based programs.

Medicare is a federal health insurance program that covers, among others,

all people who have received Social Security disability benefits for 24

months or longer. Medicare and Medicaid provide essential and

complementary services to dually eligible beneficiaries. For example,

Medicare is the primary provider of inpatient and physician care, while

Medicaid generally provides prescription drugs. Some estimate that about

one-third of disabled Medicaid beneficiaries nationally are also covered by

Medicare, but proportions will vary from state to state. For example,

Oregon officials estimate that 45 percent of disabled beneficiaries are also

covered by Medicare.

25Long-term care is included because the District’s program is designed to help disabled children make

the transition from institutional to community-based care. Arizona’s long-term care program is

primarily operated by state and county agencies that subcontract to separate providers for long-term

care and for primary and acute care services, although the Medicaid program does not require them to

do so.

Page 29 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care

for Disabled Medicaid Recipients

Title V of the Social Security Act authorizes state programs to improve the

health of mothers and children, including children with special health

needs. These programs, which are limited in scope and vary among states,

provide and promote state and community-based systems of services for

children with special health needs and typically serve children from lowand moderate-income families. Such programs arrange for initial

assessments, service plans, outpatient specialty physician services, and

therapies and care coordination for children with various chronic

conditions. Disabled children may receive various therapies and assistive

equipment—speech therapy and wheelchairs, for example—funded from

title V as well as from schools that must assure children access to certain

medical services that allow them to participate in school. In many cases,

these services and equipment are also covered by Medicaid.

The often conflicting or overlapping requirements of Medicaid and other

programs, particularly Medicare, have been cited as a barrier to including

dually eligible beneficiaries in mandatory prepaid managed care programs.

In general, state officials cited the inflexibility of Medicare rules as a

deterrent to developing a Medicaid prepaid program that includes those

dually eligible for Medicare. Including those eligible for other programs

gives rise to the need for negotiations and extensive coordination between

the Medicaid staff, HCFA, and representatives from plans and other

agencies serving those beneficiaries. Table 2.4 provides examples of

barriers states encounter when attempting to include dually eligible

beneficiaries.

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for Disabled Medicaid Recipients

Table 2.4: Examples of Barriers States Face in Including Dually Eligible Beneficiaries in Medicaid Prepaid Managed Care

Programs

Program Barrier

Medicare Plans may be unwilling to participate in Medicaid prepaid programs if the addition of dually eligible

beneficiaries threatens to raise their percentage of publicly funded enrollees above 50 percent, which

would disqualify them from Medicare participation.

Medicare rules regarding surrogate decisionmakers—those allowed to make decisions for people not

able to make their own—are more restrictive than those of Medicaid, thereby complicating prepaid plan

enrollment of dually eligible individuals and affecting who may aid them in selecting a plan.

If individuals want to join the same prepaid plan for both their Medicare- and Medicaid-covered

services, timing differences between the two programs may require them to remain in Medicare

fee-for-service care for up to 2 months after they have enrolled in the Medicaid prepaid plan.

Title V programs These programs for children with special health care needs are typically administered in states by

departments of health, which are often separate from Medicaid agencies. Including these children

requires significant interagency coordination.

School-based programs Conflicts surrounding medical equipment such as wheelchairs or devices to help overcome

communicational impairments arise when children receive services through prepaid plans and through

school-based programs. In some cases, schools and plans cannot easily agree on whether the

equipment is “medically” or “educationally” necessary. In others, schools or plans restrict the use of the

equipment to either the classroom or the home, potentially leading to the need to duplicate services.

The nature and extent of coordination barriers between Medicare and

Medicaid vary depending on the extent to which states require prepaid

plan enrollment and the extent to which Medicare prepaid plans are

available. Coordination issues are lessened when dually eligible

beneficiaries remain in Medicare fee-for-service care and join a Medicaid

prepaid plan for services not covered by Medicare. But coordination issues

increase in states where beneficiaries are required to enroll in Medicaid

prepaid plans and are to be “locked in” for specified periods. Chief among

these are Medicare’s requirement that beneficiaries are free to choose a

prepaid plan or to use fee-for-service care and, when in a prepaid plan, are

allowed to disenroll at will. As a result, in states restructuring their

Medicaid programs under waivers, the potential benefits of coordinated

care may elude Medicaid beneficiaries dually eligible for Medicare who

may not be enrolled in a single managed care plan for both sets of services

or have a single primary care provider—which undermines one goal of a

prepaid program.

Although many of the state and federal officials we interviewed described

coordination of these programs as a difficult process, most states with

prepaid programs for disabled Medicaid beneficiaries are extending

enrollment to the dually eligible. In all 17 states, one or both of these

groups of dually eligible individuals may elect to enroll in prepaid plans

Page 31 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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States Are Moving Toward Managed Care

for Disabled Medicaid Recipients

(see table 2.5). For beneficiaries with Medicare eligibility, 12 states open

their Medicaid prepaid programs to participation and 5 do not. Three of

the 12 states reported allowing enrollment only if Medicare services were

obtained in a fee-for-service setting. Another six states reported that

coordination between the two programs was not a major issue because the

state had no or very few Medicare prepaid plans available to beneficiaries.

Table 2.5: Extent to Which 17 States

Include Dually Eligible Beneficiaries in

Medicaid Prepaid Care Programs,

February 1996

State

Medicare populations

included?

Title V populations

included?

Mandatory programs

Arizona Yes Yes

Delaware No Yes

Oregon Yes Yes

Tennessee Yes Yes

Utah Yes Yes

Virginia No Yes

Voluntary programs targeted only to disabled individuals

District of Columbia No Yes

Ohio No Yes

Wisconsin Yes Yes

Voluntary programs for the general Medicaid population

California Yes Yes

Colorado Yes Yes

Florida Yes No

Maryland Yes Yes

Michigan Yes No

New Jersey Yes Yes

Pennsylvania Yes Yes

Voluntary program targeted to disabled individuals and voluntary program for the

general Medicaid population

Massachusetts No Yes

More States Moving

Toward Including

Disabled Beneficiaries

Current signs point to increasing movement in the direction of prepaid

managed care for disabled beneficiaries, including greater reliance on

managed care programs in which their participation is mandatory. Table

2.6 lists additional states with approved and pending demonstration

waivers that include disabled beneficiaries.

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Table 2.6: Status of Additional Approved and Pending Demonstration Waivers Including Disabled Beneficiaries as of

February 1996

State Date submitted Date approved Prepaid enrollment Current status

Approved and implemented for groups other than disabled individuals

Minnesota July 1994 Apr. 1995 Four mandatory pilot programs for

disabled individuals

Will enroll disabled individuals

in 1997

Oklahoma Jan. 1995 Oct. 1995 Mandatory (urban providers will be

prepaid)

Will enroll disabled individuals

in 1997

Vermont Feb. 1995 July 1995 Mandatory Will enroll disabled individuals

in 1997

Approved, pending implementation

Kentucky June 1995 Oct. 1995 Mandatory Implementation planning

under way

Massachusetts Apr. 1994 Apr. 1995 Mandatory Awaiting state legislative

approval

Ohio Mar. 1994 Jan. 1995 Mandatory Will enroll disabled at a future

undesignated date

Pending

Alabama July 1995 Mandatory—a one-county pilot Under HCFA review

Illinois Sept. 1994 Mandatory (urban providers will be

prepaid)

Under HCFA review

Louisiana Jan. 1995 Mandatory Financing plan disapproved

Missouri June 1994 Voluntary pilot program for

disabled

Under HCFA review

New York Mar. 1995 Mandatory—to include disabled in

year 2

Under HCFA review

Texas Sept. 1995 Mandatory with managed

fee-for-service option

Under HCFA review

Utah July 1995 Mandatory if income lower than

100 percent of federal poverty level

Under HCFA review

In addition to Arizona, Delaware, Oregon, and Tennessee, which currently

mandate prepaid plan enrollment for virtually all their disabled

beneficiaries, six other states have received approval to require Medicaid

beneficiaries, including those who are disabled, to enroll in prepaid

managed care plans.26 All but two of the six are statewide programs, and

four of the six will enroll disabled beneficiaries 1 or more years after

enrolling other beneficiaries. Six of the seven states seeking to include

disabled beneficiaries in their prepaid programs have sought approval to

require prepaid plan enrollment by most or all of their Medicaid

beneficiaries, including those who are disabled. Of the seven,

26One of these six—Ohio—is currently experimenting with a voluntary targeted prepaid care program

for disabled beneficiaries in three counties.

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three—including Utah, which currently mandates enrollment in three

urban areas—have sought approval for statewide mandatory programs.

Hawaii, which currently mandates enrollment for low-income families

under a demonstration waiver approved in 1993, intends to seek approval

to include disabled beneficiaries in the near future. Maryland and New

Jersey are currently discussing their proposals with HCFA officials.

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Enrolling disabled Medicaid beneficiaries in prepaid managed care

heightens the need for states to ensure the quality of care provided.

Prepaid managed care, especially when participation is mandatory,

diminishes beneficiaries’ ability to “vote with their feet” by changing plans

or physicians when they are unhappy with their care. Given disabled

people’s often extensive need for care, states need an adequate set of

mechanisms both to address fears and uncertainties about receiving care

in a managed setting and to ensure that health plans are meeting their

commitments.

Important aspects of states’ quality assurance activities can fall into two

main categories: (1) building safeguards into the programs through

adequate planning and consensus-building and (2) tailoring various

aspects of the program (such as enrollment and monitoring) to meet the

specific needs of disabled individuals. To date, most of the efforts have

been made by five states with mandatory participation by disabled

beneficiaries (Arizona, Delaware, Oregon, Utah, and Virginia) or by four

states with programs targeted exclusively for disabled beneficiaries on a

voluntary basis (Massachusetts, Ohio, Wisconsin, and the District of

Columbia). Among other things, their initiatives include requiring plans to

designate advocates or case managers for disabled beneficiaries and to

include access to specific types of specialty providers, and developing

encounter data and quality-of-care standards for evaluating their managed

care programs for disabled beneficiaries. The remaining states (mainly

those with voluntary programs for the general Medicaid population) are

primarily relying on broadly scoped monitoring actions that may not be

sufficient to detect problems with care provided to specialized groups

such as disabled individuals.

Adequate Planning

and

Consensus-Building

Adequate planning and consensus among all the affected parties—health

plans, disabled beneficiaries (and their advocates), and state officials—are

critical for the development of and transition to an effective Medicaid

managed care program, according to officials in the nine states furthest

along in tailoring their programs. In particular, they stressed the need to

involve beneficiaries and advocates in planning and program design. In

two of the three states we visited (Massachusetts and Oregon), advocates

and state officials who work with disabled beneficiaries cited the use of

consensus meetings, which often involved health plan management and

medical staff, as key to the smooth transition to managed care.

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Oregon’s experience is an example of how these consensus meetings

worked. For more than a year before bringing disabled beneficiaries into

managed care, Oregon’s Medicaid staff held weekly meetings with health

plan representatives, beneficiary representatives, and state social service

agencies (from whom most disabled residents received case management

services). These meetings covered such topics as building a common set of

definitions for terms like “case management” and “case workers”—terms

each group routinely used with different meanings. The need to arrive at

such definitions was not unique to Oregon: An official in another state said

coordination meetings were needed to define “disabled” because health

plans anticipated diabetic or asthmatic enrollees, not quadriplegics or

other individuals with medically complex needs.

Officials in the three states also noted the importance of ongoing meetings

among stakeholders to address issues as they arose. They said that once

the programs had been implemented, Medicaid staff met routinely with

health plan management, medical directors, and advocacy and social

service agency representatives to discuss such issues as rates, data

reporting, and matters related to health care. These groups sometimes

formed subcommittees to study specific problem areas. For example, in

Oregon and Arizona the Medicaid and health plan medical directors have

subcommittees to develop practice guidelines and study issues concerning

disabled children. To date the state and health plan medical directors in

Oregon have adopted practice guidelines for preventive care, cerebral

palsy, spina bifida, and cleft palate. Guidelines for cystic fibrosis, Down’s

syndrome, pediatric asthma, and sickle cell disease are being developed.

One of Arizona’s subcommittees evaluates new treatments and

technologies; it granted approval for the use of certain prescription drug

treatments for cystic fibrosis and multiple sclerosis.

Tailoring Programs

Specifically to Meet

the Needs of Disabled

Beneficiaries

The same nine states have taken action in a number of other ways to

better adapt aspects of their managed care programs to address the

concerns of disabled beneficiaries. These actions include addressing

concerns about disabled individuals’ ability to continue seeing established

caregivers, helping disabled individuals and their families decide which

plan to select, providing access to a range of available services, and

monitoring the quality of services provided.

Resolving Concerns About

Medical Necessity

Among the most important issues regarding access to services that need

resolution is how the concept of “medical necessity” will be applied in

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prepaid care situations involving disabled enrollees. Definitions vary

widely in their sensitivity to the needs of disabled individuals: Some

include the need for improvement or restoration of function within a

specified number of treatments or time period (often 60 days), while

others include consideration of preventing the progression of adverse

health conditions or the cost-effectiveness of the treatment.

The strict application of a narrow definition of medical necessity can

conflict with disabled enrollees’ needs, particularly in the case of services

that offer little hope for improvement but can help to maintain existing

quality of life. For example, people with neuromuscular disabilities may

need physical therapy to prevent deterioration and reduce discomfort even

when restoration or functional improvement is not possible. Conversely,

state officials also pointed out that, in applying the concept of medical

necessity, health plans’ flexibility can provide an opportunity for them to

supply services over and above those available in the fee-for-service

program. For example, in one state a child received a technologically

enhanced bed (not covered under the state’s fee-for-service program)

because health plan officials decided the bed was likely to reduce

hospitalizations for pressure sores and infections.

The three states we visited address concerns about medical necessity

primarily through the appeal process, giving the medical director of the

Medicaid program authority to overturn health plan decisions regarding

what is medically necessary for an individual recipient. However,

advocates for disabled individuals said reliance on the complaint and

grievance process puts an undue burden on beneficiaries because (1) the

process requires a significant amount of self-advocacy on the part of

beneficiaries who may not be capable of it and (2) the process can be

extremely time-consuming.

Some states are beginning to include a definition of medical necessity in

health plan contracts and to supplement this definition with guidance on

or monitoring of its application. For example, Arizona approached the

issue by including the concept of “habilitation” (the extent to which

treatment helps to maintain a recipient’s current ability to function) in its

monitoring of health plan services. Similarly, Oregon issued guidance for

health plans to use in approving various therapies and equipment

emphasizing such nonmedical outcomes as enhancement of independent

living.

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Addressing Concerns

Through Enrollment and

Related Programs

Among states that offer prepaid managed care to disabled beneficiaries,

only those with mandatory enrollment have significant percentages of

their populations participating. The low participation in other states may

reflect, among other things, concerns of disabled individuals about relying

on a prepaid care system. When prepaid plan enrollment can be required

of beneficiaries, state decisions about enrollment—such as who will enroll

recipients, what sorts of education programs will be involved, and how

beneficiaries will be assigned to a health plan if they do not choose

one—become more prominent among the concerns of disabled

beneficiaries, according to advocates in the states we visited. States we

contacted reported using various approaches to enrollment, assignments,

and exceptions to remain in the fee-for-service system.

Client Enrollment Some states view the process of enrolling beneficiaries in Medicaid

managed care programs as an important opportunity to educate and

counsel beneficiaries—sometimes individually—about both managed care

and the need to choose from among participating health plans. The three

states we visited generally applied many of the steps they use for other

beneficiaries when they enrolled disabled beneficiaries.27 Other steps

included the following:

• Oregon sends disabled beneficiaries (1) a booklet that the state

developmental disabilities council created to educate beneficiaries about

managed care and (2) a chart comparing the features of available health

plans. The booklet contains worksheets to help beneficiaries identify their

health care needs and detail their existing provider network so that they

can better select an appropriate health plan.

• In Massachusetts advocates were concerned that managed care might

disrupt the existing provider networks from which disabled beneficiaries

receive care.28 State staff and advocates adopted a health needs

assessment that enrollment staff use to help beneficiaries select existing

or other appropriate providers. The state also adopted a more flexible

approach allowing specialists to serve as primary care providers for their

27Examples of such steps include sending beneficiaries materials informing them of their rights and

responsibilities under managed care, sending summary information about participating health plans,

and making materials prepared by health plans available for beneficiary consideration. In these three

states, the materials sent to beneficiaries contained lists of participating clinics and hospitals but not

individual primary care practitioners (except in one instance) or specialty care practitioners. However,

in all three states, beneficiaries could contact state enrollment staff or participating health plans to

obtain primary care practitioner lists.

28Massachusetts’ program waiver requires all beneficiaries—including disabled beneficiaries—to select

either a prepaid plan or a primary care case manager. In October 1995, HCFA approved state officials’

request to begin assigning beneficiaries to a prepaid plan.

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disabled patients and allowing beneficiaries to enroll with providers

outside their geographic service areas.

Although each state makes educational materials available, state staff

familiar with cognitively impaired beneficiaries in two states reported that

written materials were seldom helpful to this population. Instead, for these

beneficiaries, education largely occurs through the one-on-one

relationships between case workers and beneficiaries and their families.

To ensure that needed equipment and supplies are provided without

interruption while a beneficiary’s enrollment is processed and a primary

care provider is selected, Oregon also developed a process to inform the

selected plan in advance about an individual’s health care needs.

“Continuity of care referral” forms alert prepaid plans to life-sustaining,

ongoing treatment needs of individuals enrolling. Social service agency

case workers, who enroll disabled beneficiaries in the prepaid plans they

select, complete a form for each individual with life-sustaining

needs—such as oxygen supplies—and forward it directly to the plan’s care

coordinator. Delaware and Virginia also require plans to either maintain

existing plans of care or develop transition plans for people with ongoing

care needs.

Exceptions States with mandatory prepaid plan enrollment face decisions about

whether, or if, to allow exceptions for certain beneficiaries to receive

fee-for-service care. Delaware, Tennessee, Utah, and Virginia—four of the

six states with mandatory programs—essentially do not allow exceptions,

though individuals may receive care in a fee-for-service setting for a short

time while eligibility and enrollment forms are processed. In Arizona,

Native Americans living on reservations may elect not to enroll in prepaid

care. Oregon allows case workers, in concert with beneficiaries and their

families, to decide whether prepaid managed care is the best delivery

system. Most exceptions involve an ongoing relationship with a

practitioner who does not participate in any of the managed care

networks, while others are for situations in which the beneficiary is

involved in an ongoing treatment regime or when changing practitioners

could seriously harm the individual.29 Some exceptions are short-lived,

delaying enrollment by up to 1 year; others may be permanent. Oregon

Medicaid officials monitor exceptions granted by case workers to

determine, among other things, whether any trends develop.

29Oregon also grants exceptions for religious or Indian heritage reasons.

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Assignment States with mandatory enrollment programs for broader segments of the

population, such as low-income families, often develop systems that

automatically assign beneficiaries to a health plan if they do not select one

for themselves. This assignment is usually based on geographic proximity.

The three states we visited each took a different approach to assigning

disabled enrollees. Oregon decided against assigning disabled

beneficiaries, relying instead on each social services case worker selecting

a plan in consultation with beneficiaries or their families. In Arizona,

severely disabled recipients who receive both acute and long-term care do

not have a choice among providers because only one contract is awarded

in each county. Less severely disabled beneficiaries are assigned to plans,

when they do not choose from among those available, based on results of

the state’s competitive bidding process, with the lowest-cost plans

receiving proportionately more assignments. In Massachusetts, nurse

review panels analyze beneficiaries’ claims histories to determine the

health needs of those who do not choose health plans so that assigned

plans are more likely to have the capacity to meet their needs. Enrollment

staff try to contact beneficiaries after assignment to ask about their

satisfaction and help them select another provider if the relationship is

unsatisfactory.

Active Management of a

Disabled Beneficiary’s

Care

Most of the nine states furthest along in tailoring their programs have also

taken steps to ensure that disabled beneficiaries receive coordination of

services through a process called “case management.” The four small-scale

programs aimed exclusively at disabled individuals have included specific

requirements for case management services. Examples of such

requirements are (1) coordination of a range of needed services, such as

transportation, community support services, and primary and specialty

care; (2) development of individual plans of care that ensure continuity

and coordination of care among various clinical and nonclinical settings;

and (3) stipulation that case managers be social workers or nurses with

specific training in working with disabled people. In Wisconsin’s program,

if case managers do not perform a needs assessment within 55 days of

enrollment, the beneficiary is automatically disenrolled from the program.

Among the mandatory programs, Arizona and Delaware have also taken

steps regarding case management. Arizona’s program for the more

severely disabled requires contractors to provide case management

services, although no such requirement exists for health plans serving the

less disabled. Arizona requires case managers to perform a needs

assessment within 15 days and complete a plan of care within 30. Failure

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to meet these requirements can result in a financial penalty. For the

severely disabled, Arizona also established maximum ratios of 1 case

manager to 40 community-based enrollees and 1 case manager to 120

institutionalized enrollees. Delaware requires plans to provide case

managers for disabled children. These case managers visit children in their

homes to assess the children’s needs in concert with their families.

Requiring Plans to Provide

Staff Advocates or Access

to Specific Specialties

Several other actions are similar to case management in that they are

directed at ensuring that disabled enrollees receive appropriate care. One

of these actions is a requirement for a “designated advocate.” Oregon and

Wisconsin require health plans to have designated contact staff available

for disabled enrollees and their families. These staff, called “exceptional

needs care coordinators” in Oregon and “Medicaid advocates” in

Wisconsin’s targeted program, function as advocates for enrolled

beneficiaries and must meet specific requirements for experience or

training in working with those who are disabled. Oregon also created a

state-level ombudsman to serve as a contact point for disabled

beneficiaries and to help coordinate the activities of the plan-based care

coordinators. Advocates for disabled individuals in Oregon said the

coordinators perform a vital role in educating health plans on appropriate

care for disabled enrollees.

Another way in which states can help ensure access to appropriate care is

to require health plans to provide enrollees access to specific specialty

services. For example, Utah requires prepaid plans that serve disabled

children to provide timely access to pediatric subspecialty consultation

and care, and rehabilitative services from professionals with pediatric

training. For selected disabling conditions such as spina bifida and

cerebral palsy, children must have timely access to coordinated

multispecialty clinics for their disorder. Delaware requires health plans to

consider disabled enrollees’ requests for specialists to serve as primary

care practitioners, including requests for specific specialists not affiliated

with the prepaid plan. Denials of these requests may be appealed to the

Medicaid agency. As of April 1996, two requests for pediatric specialists

had been granted, both of which were for specialists not affiliated with the

plan. Prepaid plan response to such requests is included in periodic state

monitoring.

Monitoring Plans for

Compliance With

Contractual Requirements

Another category of quality assurance mechanisms is the compliance

monitoring normally performed for all Medicaid prepaid care plans. This

monitoring helps to assure the state that health plans are delivering the

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health services they are paid for and doing so in accordance with state and

federal requirements. However, most of this monitoring activity is not

specifically targeted to any eligibility group. Without some form of

adjustment (a step some states are beginning to take), this monitoring will

have limited effectiveness in systematically identifying problems that

disabled beneficiaries may be having with their care.

Federal regulations promulgated by HCFA are the basis for much of the

monitoring activity. They require, for example, that prepaid plans allow

enrollees, to the extent possible, to choose their health practitioners and

maintain a program that allows enrollees to voice complaints and provides

for speedy resolution. States may establish performance measures to

determine compliance with federal access standards. For example, as

measures of access to care, states may set standards for time frames for

linking enrollees with primary care practitioners, waiting times for

scheduled appointments, enrollee travel time to a provider, and capacity

ratios of providers to enrollees. The following are additional examples of

HCFA requirements for access and quality:30

• Health plans must offer enrollees health services comparable to those

available for non-enrolled beneficiaries in the same locale.

• Health plans may not discriminate against enrollees on the basis of their

health status or need for health services.

• Health plans may not terminate enrollment because of an adverse change

in the enrollees’ health.

• Emergency services must be available 24 hours a day, 7 days a week.

• The state must provide for annual external reviews conducted by an

independent reviewer.

• Health plans must maintain an internal quality assurance program.

States typically monitor compliance with these and other state and federal

requirements through periodic (usually annual) site visits and reviews of

health plan policies and procedures. Some data, such as disenrollments

and complaints and grievances data, are collected and reviewed quarterly.

In addition to these requirements, some states survey enrollees

periodically to determine their level of satisfaction with the care received

from participating plans.

Monitoring activities specifically related to disabled enrollees were

limited. Of the 17 states with prepaid programs that include disabled

30Other federal requirements pertain to health maintenance plan organization and administration, data

systems, financial solvency, marketing, member services, and utilization review. These requirements

are specified in sec. 1903(m) of the Social Security Act and 42 C.F.R. 434.

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Medicaid beneficiaries, 9 reported no specific monitoring efforts designed

to assess quality of and access to care for this population.31 For example,

only those states with programs targeted specifically to disabled

beneficiaries analyzed complaints and grievances by eligibility category to

learn the views of disabled enrollees. Also, two states we visited reported

using the results of their monitoring efforts to apply incentives and

sanctions to influence health plan behavior. However, neither state had

encountered treatment of disabled enrollees that would warrant the use of

sanctions.

Among those nine states without specific monitoring efforts for disabled

enrollees, there was acknowledgment that more needed to be done.

Officials in eight of these states said more focused efforts would be

needed as more disabled beneficiaries enrolled in prepaid plans. For

example, these states currently rely heavily on disabled recipients’

freedom to disenroll from or transfer among prepaid plans and the

existence of a complaint and grievance program. However, disabled

beneficiaries may choose to disenroll rather than complain about the care

they receive and, even if they complain, their concerns may be masked by

a low overall complaint rate for all eligibility categories unless complaints

are analyzed by eligibility group. Thus, without more focused effort, such

measures will not reveal systemic problems in care for disabled enrollees.

Current monitoring programs do have the potential to provide more

information about care delivered to disabled beneficiaries, as the

following examples indicate:

• States could extend their current efforts to assess specific aspects of

health care delivery to disabled enrollees. Some states that do not assess

care for disabled individuals do conduct assessments of maternal and

child care. States that conduct reviews of prenatal, well child, or asthma

care could require studies of care for specific disabling conditions present

among the plan’s enrollees. For example, a Massachusetts prepaid plan, on

its own initiative, studied the management of pressure sores, a common

cause of hospitalization, as an area of quality improvement. One result was

the development of a variety of methods, including new screening

protocols for earlier intervention and an accelerated schedule for

wheelchair seating evaluations, to further improve care.

31One of these nine (Delaware) has taken specific steps to allay concerns of disabled beneficiaries

about relying on prepaid plans and to help ensure access to appropriate providers, some of which have

been discussed in this chapter. However, as of April 1996, the state had no specific measures to assess

care received by disabled enrollees.

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• Consumer surveys could include questions about eligibility status, and

samples could be designed to ensure that sufficient numbers of disabled

beneficiaries were included. States could also request disenrollment or

utilization data reported by eligibility category to allow comparisons with

other eligibility groups or across health plans. States might, as one

reported, interview individuals requesting disenrollment to gather more

in-depth information about the care received. In 1996, Virginia will

conduct a survey of all disabled beneficiaries who disenrolled during the

year.

• States have great flexibility in deciding how to structure required external

reviews, which represent an opportunity for closer scrutiny of issues

facing disabled individuals. Oregon, the District of Columbia, and Virginia

are seeking proposals from external professional review contractors for

studies specifically designed to measure the quality of care for disabled

enrollees.

The steps taken to monitor plans once they are up and running need not

be limited to modifying existing Medicaid oversight requirements.

Targeted quality-of-care studies and quality improvement goals have been

instituted by one or more of the eight states.

Targeted Quality-of-Care

Studies

Arizona, the District of Columbia, Ohio, and Virginia will begin in 1996 to

conduct additional quality-of-care studies focused specifically on care for

disabled enrollees. Arizona’s studies will include outcome measures, such

as the frequency and reasons for hospitalizations and emergency room

visits, rates and changes in pressure ulcers, and changes in functional

abilities. Since 1990, Arizona staff have also visited a random sample of

developmentally disabled beneficiaries in their homes to determine

satisfaction with services and progress in fulfilling individualized plans of

care developed by their health plans. The District of Columbia, Ohio, and

Virginia are collecting encounter data from health plans and will evaluate

care beginning in 1996 or 1997. A fourth state—Wisconsin—is scheduled

to release by December 1996 an evaluation of its program conducted by

independent researchers.

Quality Improvement Goals Massachusetts uses quality improvement goals and contractor selection

specifications to build health plan capacity to meet the needs of Medicaid

beneficiaries. Each year, the state identifies quality improvement goals for

all health plans and requires each plan to select additional goals. Twice

annually, Medicaid staff meet with health plans to review progress in

meeting stated goals. For each contracting cycle, the state identifies

capabilities it expects successful contractors to possess. These goals and

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specifications have included developing capacity to serve disabled

individuals. For example, one health plan elected to develop and

implement a program for enrollees with human immunodeficiency virus

(HIV) or AIDS to provide case management and access to specialists trained

in infectious diseases. Selection criteria for 1995 required prepaid plans to

demonstrate how they provided reasonable access to services for

enrollees with physical and communicational disabilities as measured, in

part, by enrollee satisfaction.

Programs Can Be

Strengthened by

Analysis of Encounter

Data

Under a fee-for-service approach to Medicaid, states have ready access to

data on services performed because they reimburse providers for those

services. These data—called claims data in fee-for-service systems and

encounter data in prepaid managed care—consist of such information as

the patient’s identity, type of service, date of delivery, diagnosis, and

provider. In a prepaid care setting, states do not need such data for

reimbursement purposes. Many plans have—and use—this information,

but unless states specifically request it, the information can largely

disappear from view.

This information can play an important role in quality assurance,

estimations of future service use, research, and program planning. It can

also play an important role in rate-setting, the subject of the next chapter.

However, state experience to date shows that a substantial investment of

time and effort is needed to assemble a workable encounter database,

although the potential applications appear to make the effort worthwhile.

Encounter Data Have Had

Limited Use to Date

When Arizona, Oregon, and Tennessee received approval to implement

statewide Medicaid mandatory managed care programs, HCFA required

them to collect and validate encounter data, mainly for use in independent

evaluations of the programs. These states, which have had significant

experience in collecting such data, all had difficulty obtaining information

of sufficient quality and comprehensiveness to use in quality assurance

reviews. The problems were numerous: The data were not readily

available, health plans used a variety of data systems, and definitions

varied from plan to plan.

• Arizona has had by far the most experience in collecting and using this

information for quality assurance purposes. However, the state spent over

10 years and $30 million getting to the point that the Medicaid department

could use encounter data for quality analysis.

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• Oregon and Tennessee are experiencing collection and validation

problems similar to those Arizona experienced initially. In each of these

states, staff spent considerable time editing the data, working with health

plans to overcome problems, working to resolve significant data reject and

coding problems, and implementing validation strategies. In Oregon and

Tennessee, relatively complete and usable data elements were not

available until almost 2 years after enrollment began.32

State use of encounter data in quality reviews is also limited to some

extent by the lack of a recognized standard for what level of care is

considered appropriate for people with disabilities. In addition, quality

measures for chronic and disabling conditions are just now being

developed. Current federal and privately funded research and

development in the field of quality analysis will provide states with more

definitive criteria to use in their analyses.

Encounter Data Analysis

Shows Potential in Quality

Control Applications

While assembling adequate databases is difficult and expensive, the effort

can yield substantial results in terms of the ability to monitor programs.

The types of studies that could be conducted using person-level encounter

data include tracking patterns of services by health plan or eligibility

group, identifying providers serving special needs populations, and

tracking the movement of high-cost patients among health plans.

Encounter data could also be analyzed to reveal patterns of under- or

overutilization. Although linking such patterns to quality of care in all

cases is limited by the lack of recognized standards, patterns of service

use can reveal access problems. For example, Arizona officials analyzed

encounter data and found very low use of dental services among all

beneficiaries. The access problem was resolved when state officials

removed the requirement that beneficiaries receive a referral from their

primary care provider before obtaining dental care.

Encounter data for Oregon’s disabled enrollees are just becoming

available for analysis.33 As a result, no studies are yet under way. However,

state officials listed the following as possible uses for encounter data:

32Some other states are also collecting encounter data but are not attempting to use them in this way

as yet. Florida and Maryland reported collecting encounter data, but neither reported using such data,

at present, in studies of care for disabled enrollees. California collects encounter data in one county.

Delaware, Pennsylvania, Utah, and Virginia have either just begun or will within the next year collect

such data.

33Enrollment by disabled beneficiaries was phased in over 9 months beginning in February 1995. As a

result, the collection and availability of encounter data for disabled beneficiaries lag behind data for

previously enrolled groups of beneficiaries.

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comparing utilization to adopted practice guidelines to assess the extent to

which they had been implemented; identifying providers serving special

needs populations; identifying and tracking high-cost enrollees; identifying

areas of underservice for selected services; identifying gaps in follow-up

care or preventive care for selected enrollees; and analyzing enrollment to

detect adverse selection by selected diagnoses.

We also identified other innovative uses of data systems for more limited

quality or access reviews:

• Arizona monitors case management for certain disabled Medicaid

beneficiaries through on-line systems. The state provides case managers

with the terminals and software with which they record the individuals’

plan of care and progress in meeting stated goals. This information is then

transmitted to the Medicaid department for immediatiate review.

• The contracting health plan in the District of Columbia also plans to use an

on-line system for its own and the District’s monitoring of care for

enrollees. For case managers providing 24-hour medical access to

beneficiaries and their families, the system gives access to care plans,

service authorizations, and even scanned-in photographs of the children.

• In Massachusetts, the Medicaid department compared managed care

aggregated utilization data with fee-for-service claims data to determine

whether mental health services were underutilized. The state took

immediate action to work with prepaid plans that needed to correct

utilization problems.

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Adequate quality-of-care safeguards provide some protection against the

potential risks of prepaid managed care. Paying health plans a capitation

rate in advance to provide enrollees a set of services creates an incentive

to improve efficiency by eliminating unnecessary services. However, it

simultaneously creates certain risks. First is a risk of underservice,

because plans can profit by reducing the number or quality of beneficial

services. Second is the risk that when the same capitation rate is paid for

enrollees with different health care needs, plans will seek to enroll the

healthier, less expensive individuals. These risks may be greater when

plans feel financial pressure from actual or potential losses from serving

enrollees with extreme needs.

States are examining ways to reduce these incentives and pressures in

prepaid care plans that have a disproportionate share of beneficiaries with

high-cost medical needs, such as severely disabled people. States’ efforts

have been of three main types:

• Using risk-adjusted capitation rates to more closely match the

reimbursement rates with anticipated costs of treating individual

recipients.

• Sharing financial risk by providing retrospective adjustments (called

“reinsurance”) to reimburse plans for losses resulting from very high-cost

individuals or disproportionate numbers of enrollees with above-average

costs.

• Establishing funding agreements with “risk corridors” that reimburse

plans for a portion of losses but also require plans to return part of the

profits exceeding a specified level.

For the 17 states we contacted with managed care programs for disabled

beneficiaries, most state activity to date has centered on reinsurance.

Initiatives to establish risk-adjusted rates for disabled enrollees or to set

up risk corridors in funding agreements are fewer in number and have

much shorter track records. Risk-adjusted rates—currently implemented

in only two states—are seen as potentially beneficial by many states but

also as administratively difficult to develop and maintain. As the only

mechanism that specifically limits health plan profits, risk corridors

appear to have the greatest potential for reducing plans’ incentives to

underserve or to enroll only the healthier beneficiaries. To date, five states

have taken steps to build risk corridors into their payments to plans.

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Traditional

Rate-Setting Approach

Does Not Address

Negative Incentives

and Pressures

In setting capitation rates, states make an effort to account for differences

in expected costs for broad categories of beneficiaries. To do this, they

frequently divide the eligible population into subgroups, or cells, of

individuals with similar characteristics. Of the 17 states we contacted, 16

established rate cells according to Medicaid eligibility category, such as all

disabled people or all children in AFDC-eligible families, with some

adjustment for age or the geographic area in which the beneficiaries

reside.34

Setting capitation rates in this way meets HCFA requirements and provides

appropriate payments to plans as long as each plan’s enrollment mix of

beneficiaries with complex health care needs is comparable with the mix

of the population used to set the rates.35 The money saved serving

enrollees with lower-than-average costs pays the cost of serving enrollees

with higher-than-average costs. However, plans may not enroll disabled

people with health care needs comparable with those included in setting

the rates. While some disabled enrollees may require little medical

treatment, others may have disabilities, such as quadriplegia, that require

extensive treatment. The identifiability of such groups and the high costs

associated with their care heighten the incentives for health care plans to

avoid enrolling such individuals.

In most state programs, the rate-setting methods do not take into account

the cost variation associated with different types of disabling conditions.

Researchers have identified significant variation in medical costs within

different subcategories of conditions. For example, using 1992

fee-for-service claims data divided along clinical diagnoses, researchers

found average annual costs ranging from nothing (for the 5 percent of the

disabled population that had no medical claims during the year) to $35,000

per year in one state for an individual diagnosed with quadriplegia.

Similarly Oregon found tremendous variation in 1993 health care costs

among its 199 highest-cost children. The 6-month group average was

$21,472, but amounts varied from a high of $410,420 to a low of $5,014. In

34For example, Oregon’s 1996 (January through September) average rate for categorically eligible

children in families under the federal poverty level is $126.15 per month, while its average rate for

blind or disabled individuals who have no Medicare coverage is $521.81 per month.

35Richard Kronick, Zhiyuan Zhou, and Tony Dreyfus, “Making Risk Adjustment Work for Everyone,”

Inquiry, Vol. 32 (Spring 1995).

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1995, Oregon’s average 6-month capitation rate for disabled individuals in

the cell that includes these children was $3,023.36

High-Cost Cases

Strengthen Pressure to

Seek Healthier Enrollees

With such a broad range of costs within the category of disabled enrollees,

a health plan being paid on the basis of average costs may make profits or

experience losses unrelated to its ability to provide high-quality health

care services efficiently. Instead, these profits or losses may be a function

of how many high-cost cases it does or does not enroll. A health plan with

a disproportionate number of high-cost cases that result in unanticipated

losses is said to be experiencing “adverse selection,” while a plan with few

high-cost cases is said to be experiencing “favorable selection.”

The greater the difference between the high- and low-cost recipients in

each cell, the greater the pressure on plans to avoid enrolling high-cost

recipients or to underserve the high-cost beneficiaries who do enroll.

Favorable selection may happen unintentionally in that, as research

suggests, some people—often those with few health care needs—may be

more prone to select prepaid care when given the option. But, plans can

also avoid enrolling high-cost members by using a variety of methods that

may be difficult for states to detect.

• Manipulating the panel of providers. Health plans can avoid high-cost

recipients by dropping providers that attract high-cost patients. For

example, a former health plan official told us that the health plan she

worked for identified a specific provider who was responsible in large part

for the plan’s attracting a significant number of enrollees with AIDS—a

condition that frequently requires extensive and expensive treatment,

especially in its later stages. This plan dropped the provider from its panel

in favor of an AIDS treatment clinic and saw its AIDS caseload decrease. The

decision to drop the provider may have been for other reasons, in that by

adding the clinic and dropping the individual provider, the health plan may

have improved its capacity to treat people with AIDS and the quality of care

they would receive. The outcome demonstrates, however, recipients’

attachment to specific providers and health plans’ ability to (1) identify

specific providers as magnets for high-cost recipients and (2) reduce the

cost to treat these recipients by dropping or replacing certain providers.

• Limiting access to information about specialty providers. Health plans can

also make it difficult for prospective enrollees to find out which specialty

36Because (1) Oregon lacked a systematic approach to case management for these children and

(2) plans have limited flexibility in providing low-cost in-home care, the most “medically fragile” of

these children were taken out of prepaid care and are being served on a fee-for-service basis with case

management by state staff.

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providers are available through the plan. In one state we studied, the state

and health plans initially resisted distributing a handbook produced by an

advocacy group designed to help disabled Medicaid recipients select a

health plan that could best meet his or her particular needs. The booklet

contained a worksheet for individuals to detail their specialty care

requirements. The state and health plans were concerned about the

possibility of adverse selection and felt that, without this information, the

high-cost cases would be more evenly distributed among the various

health plans.

• Using marketing efforts to discourage enrollment. Some states have

allowed plans to conduct direct marketing as a way of enrolling

beneficiaries in managed care. However, through direct marketing, health

plans can also attempt to deliberately influence the distribution of

high-cost enrollees. For example, they may seek information on a person’s

health status or discourage—or not aggressively market to—those likely to

have more expensive needs. Consequently, several of the states in our

review prohibited or severely limited the amount and content of marketing

by health plans.

• Remaining silent about new treatment approaches. The wide gap between

the relatively healthy and the sick within a rate cell also discourages the

dissemination of information about health plans that have found

innovative and successful ways to treat enrollees with difficult conditions.

One health plan official told us that when the plan develops innovative and

successful ways to treat the chronically ill, it does not advertise this fact

because the resulting increase in enrollment of chronically ill individuals

could be financially devastating. This health plan had success in managing

asthma, and as word of its success spread, the number of asthmatics

enrolling in the plan increased dramatically. This increase had such a

negative financial impact on the health plan that it asked the state to cap

its enrollment to prevent additional high-cost recipients from enrolling.

When the incentive of health plans to develop innovative treatments

decreases, disabled individuals are adversely affected in that they may

miss out on new and effective treatments.

Determining whether a health plan is facing adverse selection goes beyond

reviewing the plan’s financial statements to see if there is a profit or loss.

Health plans that do poorly managing care may lose money and blame it

on adverse selection even though they may in fact be the beneficiary of

favorable selection. Alternatively, plans actually experiencing adverse

selection may limit services to such an extent they are still able to show a

profit. Medicaid officials told us it is not uncommon for all participating

health plans to describe themselves as victims of adverse selection, an

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impossible situation. However, these states had limited ability to verify or

refute such claims with any certainty.

States Could Experience

Adverse Selection and

Lose Money With Managed

Care

Health plans are not the only players in the Medicaid managed care

marketplace that can face adverse selection and financial risks. When

prepaid managed care plan enrollment is voluntary (as it is in 11 of the 17

states now using prepaid care for some or all of their disabled

beneficiaries), the state may experience adverse selection. Specifically,

where participation is voluntary, beneficiaries with relatively few health

care needs (who may have few, if any, existing relationships with

specialists) may choose prepaid care, while beneficiaries needing more

expensive care (who may have long-standing relationships with specific

providers) may choose to remain in fee-for-service care. When enrollment

is mandatory but exceptions are allowed, a state may similarly face

adverse selection.

Enrollment patterns in which the users of the most expensive medical

services are in fee-for-service care and the relatively healthy in prepaid

managed care are not problematic if the rate the state pays the health

plans is adequately adjusted for the health status of the enrollees.

However, in many cases, the rates paid to health plans are based on the

average cost of providing care to an entire eligibility category and may not

appropriately account for those that do not elect prepaid care.

Consequently, the state pays the full cost of treating the expensive

beneficiaries through fee-for-service care and too high a rate for the

lower-cost health plan members. This problem may be compounded in

that it is likely that future capitation rates would be based on the costs of

serving those remaining in fee-for-service care—individuals who are likely

to be less healthy and consequently more costly.

Just as it is difficult to tell if a health plan is experiencing adverse

selection, it is very difficult to determine whether a state is experiencing

adverse selection. An Oregon Medicaid official suspects that the state’s

enrollment exemption process for disabled individuals, which allows case

workers to determine if prepaid managed care is appropriate for individual

beneficiaries, may be resulting in adverse selection for the state.

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Risk Adjustment and

Reinsurance Have

Some Impact on

Incentives for

Favorable Selection

or Underservice

To address the concerns associated with adverse and favorable selection,

some states are beginning to experiment with risk-adjusted methods for

setting capitation rates. Risk adjustment is an attempt to match the rates

paid to health plans with the expected costs of providing appropriate

services to individual recipients. It essentially groups beneficiaries

according to expected future expense and narrows the gap between the

highest-and lowest-cost individuals in any given rate cell. This reduces the

payoff for selecting only the healthiest recipients and provides better

assurance that the state is not paying too much for individuals who are

relatively healthy or too little for individuals who need such complex and

expensive care that health plans are at best unwilling to attract and at

worst unwilling or unable to accommodate them.

However, the actual application of risk-adjustment methods to the

development of capitation rates for disabled Medicaid beneficiaries is very

limited.37 To date, only two states (Massachusetts and Ohio) have

implemented any risk-adjustment methods, and only one other state

(Missouri) has active plans to do so. Other states told us that risk

adjustment was too administratively difficult to implement and that they

looked to reinsurance to protect plans that experience adverse selection.

Reinsurance does not, however, affect plans’ incentive to seek favorable

selection.

Risk Adjustment Is Largely

Untested for Disabled

Enrollees

The three states experimenting with risk-adjusted rates have based their

adjustments on a beneficiary’s prior utilization of medical services or a

beneficiary’s clinical diagnosis. Researchers point out that such measures

may better predict future costs since disabled individuals, compared with

the population as a whole, have a higher percentage of their health care

costs related to chronic (recurring or consistent) conditions than to acute

(random) conditions. Still, for risk-adjustment methods to be useful,

attention must be paid to whether the predictive measures are sufficiently

reliable and administratively feasible to collect.

Risk Adjustment Using Prior

Utilization Rates

Utilization-based risk adjustment attempts to predict a person’s future

health care costs based on a measure of prior use, such as the costs of

services or the number of hospital days used in a previous period. For

example, a health plan could be paid a higher-than-average amount if the

37To date, research on risk-adjustment mechanisms has concentrated more extensively on the

Medicare population. We examined risk-adjustment mechanisms among the Medicare population in

two reports, Medicare: Changes to HMO Rate Setting Method Are Needed to Reduce Program Costs

(GAO/HEHS-94-119, Sept. 2, 1994) and Medicare Managed Care: Growing Enrollment Adds Urgency to

Fixing HMO Payment Problem (GAO/HEHS-96-21, Nov. 8, 1995).

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person spent several days in the hospital in the last year or a

lower-than-average rate if the person spent no time in the hospital or did

not visit the doctor in the last year.

To set capitation rates for its disabled population, Ohio is moving forward

with a pilot project that uses a beneficiary’s prior utilization (measured in

dollars) in the fee-for-service system. This program, called Accessing

Better Care, uses eight rate cells for the disabled population. Seven of the

cells are based on prior expenditures, and the eighth is for newly eligible

beneficiaries. Monthly capitation rates range from $165 (for beneficiaries

with prior annual costs of $1,000 or less) to $4,501 (for beneficiaries with

prior annual costs of $50,000 or more). Figure 4.1 shows how Ohio’s

disabled beneficiaries are distributed among the seven prior-expenditure

categories.38 More than half of all disabled beneficiaries are in the

lowest-cost cell.

Figure 4.1: Ohio’s Risk-Adjusted

Capitation Rates and the Percentage of

Disabled Population at Each Rate

Percentage of Disabled Population

0

5

10

15

20

25

30

35

40

45

50

55

$165 $345 $517 $686 $1,091 $1,917 $4,501

Risk-Adjusted Monthly Capitation Rate

Risk Adjustment Using

Clinical Diagnosis

Another approach predicts future health care costs using beneficiaries’

individual clinical diagnoses. Various methods to identify or classify

diagnoses can be used, employing inpatient data, outpatient data, or both.

38The distribution is an average from 1991 and 1992 fee-for-service data.

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Some methods rely on an individual’s primary diagnosis, and others

incorporate measures of the severity of the primary diagnosis as well as

the existence of secondary diagnoses of conditions that may aggravate the

individual’s health status.

Massachusetts is one of two states working with a diagnosis-based

approach. It has identified a few disabling conditions that warrant higher

rates and, as a result, has created a three-celled, diagnosis-based

risk-adjustment system for its disabled Medicaid population. Severely

disabled beneficiaries and those with end-stage AIDS (in both cases meeting

clinical criteria detailed by the state and receiving an enhanced benefits

package) have capitation rates of about $1,500 and $4,400 per month,

respectively, compared with about $500 per month for beneficiaries in the

general disabled category.

Missouri is currently developing a diagnosis-based methodology as part of

a prepaid care program for disabled Medicaid beneficiaries scheduled to

begin in 1997. Their methodology adjusts the capitation rate paid for an

individual recipient according to both the type of diagnosis and its

severity. The state identified approximately 400 distinct diagnoses and

computed a rate-adjustment factor for each. The rate for an individual is

the sum of the adjustment factors for each of the individual’s diagnoses.

The methodology accounts for multiple diagnoses: the capitation rate for

an individual with diagnoses of muscular dystrophy and mild mental

retardation would be higher than the rate for a mildly retarded individual

with no additional disabling diagnoses. Table 4.1 shows an initial estimate

of the resulting base rate along with a sample of the diagnoses identified

and the associated capitation adjustment.

Table 4.1: Missouri Sample Diagnostic

Categories and Rate Adjustments Base rate, per month: $143

Sample diagnostic categories Adjustment

Hemophilia, other clotting factors $1,495

Cystic fibrosis, respiratory failure 1,108

Quadriplegia 517

Muscular dystrophy/paraplegia 263

Mild and moderate mental retardation 74

Note: Rate adjustments are additive. For example, the rate for an individual with muscular

dystrophy and mild mental retardation would be $480 per month ($143 for the base rate plus

$263 for muscular dystrophy and $74 for mild mental retardation).

Source: Missouri Division of Medical Services.

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Risk-Adjustment Methods Must

Be Accurate, Free From

Manipulation, and Workable

Although risk-adjustment mechanisms are designed primarily to prevent

adverse and favorable selection, implementing a risk-adjustment scheme

involves a number of other considerations. Risk-adjustment

methodologies must not only be reasonable predictors of future health

care costs, they must also be relatively insulated from manipulation by

health plans or providers, and they must be feasible in terms of

administrative and data requirements.

To prevent adverse or favorable selection, a risk-adjustment mechanism

must be able to predict health care costs. Researchers have demonstrated

that prior utilization and diagnosis-based methodologies can both have

predictive power superior to that of rates based on eligibility category.

Some prior utilization models are able to explain nearly 40 percent of the

variation in health care costs for disabled individuals, and diagnosis-based

models have been able to explain about 25 percent. However, even the

best predictors of health care costs explain less than half the variation in

costs of providing care. Plans then still have an incentive to avoid the

higher-cost members of a rate cell.

The basis selected for risk adjustment can affect the behavior of health

plans.

• With utilization models that use cost as a measure, health plans have less

of an incentive to hold down costs because less efficient health plans may

be rewarded with higher capitation rates as participants are characterized

as high use. Conversely, a plan that manages its enrollees’ care very

efficiently may be penalized with lower capitation rates in the future.

Moreover, a prior utilization method based on the number of hospital

admissions affects health plan behavior in a different way than one based

on the number of days an individual spends in the hospital. In both cases,

the health plan could manipulate the measure affecting future rates

without necessarily losing much in terms of efficiency.39

• With diagnosis-based risk-adjustment methods, “upcoding” exists in which

providers and plans record the most severe diagnosis—the diagnosis

associated with the greatest capitation adjustment—of those available for

an individual’s symptoms. The use of multiple diagnoses as factors in the

rate-setting methodology creates a situation in which providers could

record unwarranted diagnoses to raise future capitation rates.

39To account for the effects of adverse selection, some states are considering making retrospective

adjustments to capitation rates based on utilization. Such an adjustment can ease the effects of a large

number of high-cost cases, but it may also strengthen the incentive for health plans to act inefficiently.

With a retrospective adjustment, plans would be rewarded for their inefficient behavior in the current

year, rather than having to wait for higher rates in the future.

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To be useful, risk-adjustment methodologies must also have feasible

administrative and data requirements. Measures of health status, collected

through surveys, may help predict the need for future health care but may

be too administratively burdensome to be practical. Risk-adjustment

methods based on information about the use of services are more

practical. However, while such information was routinely available in

fee-for-service claims, states need a new source, such as encounter data,

to classify individuals enrolling in health plans.

The lack of fee-for-service data is not a problem limited to states that

adjust their capitation rates by risk. Any state that moves most or all of its

Medicaid population into managed care will find that prior rate-setting

methods based on averaging fee-for-service claims will be unsuitable.

While rates calculated using older fee-for-service data might be trended

forward using any of a variety of factors, over time such trending may

cause rates to be unrepresentative of the health care services being used.

To address these difficulties, some states are using or evaluating

individual-level encounter data as a basis from which they can generate

capitation rates in the future.

Reinsurance Relieves

Financial Pressure on

Plans but Not Negative

Incentives

State officials we contacted recognized the benefits of prospectively

risk-adjusting capitation rates but—with the exceptions of Ohio,

Massachusetts, and Missouri—were reluctant to do so in their programs

because they felt it was too difficult administratively. Instead, officials rely

on reinsurance to decrease the pressure on health plans serving high-cost

individuals. With reinsurance, the reinsurer (sometimes the state) protects

health plans against adverse selection or unexpectedly high-cost cases. To

obtain coverage, the plan pays a reinsurance premium.

Reinsurance programs come in many forms. Most programs involve a

reinsurance threshold, or deductible, with health plans being responsible

for all the costs of serving a group or an individual up to that amount.

Once the threshold is met, the state shares the cost of treating the group or

individual with the health plan. Table 4.2 shows the range of reinsurance

options Oregon offers in its current health plan contracts.

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Table 4.2: Oregon’s Reinsurance

Levels and Rates, 1995-97 Annual deductible per

person before state will

participate

Percentage of liability

over the deductible to be

paid by the plan

Reinsurance premium as

a percentage of capitation

$10,000 5 29.9

15,000 10 19.7

30,000 20 9.3

50,000 20 4.1

Source: Oregon Office of Medical Assistance Programs.

State Medicaid officials told us that, by protecting health plans from

extraordinary costs, reinsurance also helps build health plan capacity. For

example, new health plans and plans with small enrollments need time to

absorb spikes in service costs and the cash flow fluctuations inherent in

prepaid managed care. With reinsurance available, these plans can

participate and compete in the programs.

While reinsurance relieves some pressure on health plans faced with

expensive cases, it does not remove the negative incentives discussed

earlier. Plans still may benefit from enrolling the healthiest eligibles or

from underserving the high-cost cases that do enroll. Reinsurance

compensates plans only after they lose money on a case or on all their

enrollees. While reinsurance may relieve some pressure on plans facing

losses, it may not affect the incentives plans create with individual

providers to limit services. These incentives set out in the provider’s

contract may not automatically adjust when the costs of a provider’s

patient reach the reinsurance threshold.

In some areas, Medicaid managed care reinsurance may not be readily

available in the private market and may not be available at all for small

health plans. Consequently, state Medicaid agencies become de facto

insurance companies with the associated risk and resource requirements.

As reinsurers, states face the challenge of setting appropriate reinsurance

premiums—inappropriate premiums could lead either to plans paying too

much, and thus increasing the pressure to underserve, or plans paying too

little, which leaves the state in a money-losing position.

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Risk Corridors Have

Greatest Impact on

Negative Financial

Incentives

Five states—the District of Columbia, Massachusetts, Ohio, Utah, and

Wisconsin—are building risk corridors into their contracts to help mitigate

the potentially negative incentives affecting health plans’ treatment of

disabled enrollees.40 Unlike reinsurance, risk corridors work in two

directions, sharing both losses and profits with health plans below and

above preestablished ratios.

As the only mechanism that specifically limits health plan profits, risk

corridors have the greatest impact on incentives facing health plans to

either reach for the lowest-cost recipients in any given rate cell or to

underserve the high-cost enrollees they cannot avoid. The point at which

profit and loss sharing begins—the width of the risk corridor—varies from

state to state, as does the degree to which profits and losses are shared.

Table 4.3 shows the risk corridor arrangement Massachusetts has in its

current contract with a plan that provides prepaid care for the severely

disabled.

Table 4.3: Massachusetts Risk

Corridors for Plan Providing Prepaid

Care to the Severely Disabled

Situation at end of contract period Outcome

Plan has medical expenditures totaling

more than 10% below capitation payments

The difference above 10% reverts to the

state

Plan has medical expenditures between

0 and 10% below capitation payments

Plan keeps 40% of the difference; 60%

reverts to the state

Plan has medical expenditures between

0 and 10% above capitation payments

State pays 50% of the difference

Plan has medical expenditures totaling

more than 10% above capitation payments

State pays 75% of the difference

Source: Massachusetts Executive Office of Health and Human Services.

By reducing the potential for profits, the state is affecting implicit health

plan calculations regarding the costs and benefits of restricting services.

When $1 saved from restricting service translates to $1 of profit, a health

plan may be willing to risk losing enrollees who are dissatisfied with

health plan service. With risk corridors, however, $1 saved may only

translate to 30 or 40 cents in profit, reducing the benefit side of the

equation. Because health plans understand how risk corridor

arrangements operate before entering into Medicaid prepaid care

agreements, corridors also have the unique feature of being a retrospective

adjustment with a prospective impact. Risk corridors and their profit

limits may affect health plan risk arrangements established with individual

40In addition to these five states, Tennessee has limited profits for certain of its managed care

organizations to 10 percent but plans to discontinue the practice in December 1996.

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providers in a way that reinsurance does not. In their provider contracts,

plans may limit the incentives to reduce services when their profits will be

limited.

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Enrolling disabled beneficiaries in prepaid managed care is a growing

trend in Medicaid. Moreover, because much of the proposed expansion is

directed toward mandatory managed care, the future expansion of prepaid

care for disabled Medicaid beneficiaries appears likely to be even more

sweeping in its effect. Thus far, two-thirds of the states providing prepaid

care for disabled beneficiaries offer it on a voluntary basis. By contrast, 12

of the 13 states with newly approved or pending Medicaid managed care

waivers intend to mandate participation by disabled beneficiaries.

The implications of this shift toward mandatory programs are substantial.

Prepaid care has operated in both the public and private arenas as a

system based on averages. For example, populationwide averages drive

the expectations of what services should be provided and how much they

will be used. Likewise, prepaid rates are calculated on average costs, and

quality has been monitored, in part, using aggregated average utilization

rates. To adequately safeguard the interests of disabled beneficiaries,

however, state programs must recognize that these beneficiaries are quite

distinct from the general Medicaid population. Not only are their health

needs greater than those of the general population, but included among

them are a small number of highly vulnerable individuals whose needs are

extensive and critical to the prevention of death or further disability. Not

addressing these differences heightens the risk that prepaid care plans will

try to hold down their costs by (1) discouraging enrollment from high-cost

segments of the disabled population or (2) inadequately serving those

high-cost beneficiaries they cannot avoid.

Thus far, actions at the state level do not reflect a widespread

acknowledgment of the changes in approach that should occur when

applying managed care to disabled beneficiaries rather than the general

population. In most states, the level of effort to anticipate and

accommodate the needs of the various stakeholder groups (disabled

individuals and their advocates, the health care plans, and the

government) in their current programs has been limited largely because

participation in these programs has been voluntary. The efforts have

tended to be most extensive in those few states that have already put

mandatory or targeted programs in place.

No clear blueprint has yet emerged for how to incorporate disabled

beneficiaries into Medicaid managed care plans. The limited efforts to date

have not been in place long enough to allow definitive conclusions about

how effective they are. At this relatively early stage, however, several key

areas are emerging that merit consideration by all parties seeking to

Page 61 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 5 

Observations, Conclusions, and Comments

develop effective prepaid programs. These key areas, and examples of

state actions to address them, are illustrated in figure 5.1.

Figure 5.1: Key Approaches for Including Disabled Beneficiaries in Medicaid Managed Care and Examples of State

Initiatives

Planning and

Consensus–Building

Oregon

Met weekly with health

plans, advocates for

disabled people, and

others for more than a year

before program began

Defining

Medical Necessity

Arizona

Includes maintenance of

functional ability in its

definition of medically

necessary services

Sharing

Financial Risk

Massachusetts

Uses “risk corridors” to

limit plans’ profits and

underwrite part of losses

Adopting

Risk-Adjusted Rates

Ohio

Has pilot project that pays

plans varying rates

based on enrollees’ prior

medical costs

Improving

Enrollment

Massachusetts

Allows specialists to act as

primary care providers

and uses a health needs

assessment to help

beneficiaries select a plan

Managing

Cases Actively

Wisconsin

Mandates a needs assessment within 55 days and

requires the prepaid plan

to have a Medicaid

advocate knowledgeable

about disabilities

Tailoring Monitoring

and Oversight

District of Columbia

Intends to obtain outside

reviews of the quality of

care for disabled

beneficiaries

Developing

Workable Databases

Arizona

Developed a database of

care provided to disabled

beneficiaries for use in

quality assurance and

rate-setting

Managed

Care for

Disabled

Beneficiaries

To date, few states have significant, long-term experience with programs

that mandate enrollment by their disabled population. Even fairly

Page 62 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 5 

Observations, Conclusions, and Comments

extensive experience with voluntary programs may not fully prepare

health plans and state officials if, as research suggests, those who select

prepaid care in voluntary situations tend to be healthier than those who do

not. A state may find it useful to develop and operate a targeted or

relatively small-scale program before moving to any large-scale effort to

mandate the enrollment of disabled beneficiaries. Small-scale programs

would allow health plans, beneficiaries, and state staff to gain experience

with meeting the diverse and complex needs of disabled individuals in a

prepaid setting.

For states that elect to move immediately into a large-scale program, the

areas shown in figure 5.1 are even more critical. Adequate preparation,

consensus-building, and program safeguards assume greater significance

when substantial numbers of people are being added, particularly if their

ability to change plans readily is limited.

Understanding the various approaches currently being tried will provide

states with a good starting point for planning their own efforts. Making

prepaid managed care work for disabled individuals will be achieved only

through the combined and continuing efforts of states, health plans, and

beneficiaries and their advocates.

Agency and Other

Comments

We provided a draft of this report to the Administrator, HCFA. The draft

report was reviewed by officials in HCFA’s Office of Managed Care, Office

of Research and Demonstrations, and the Medicaid Bureau. HCFA officials

had no technical or other comments on the report draft. In addition, we

provided relevant sections of the draft report to Medicaid staff from the 17

states in our report. All but one state responded with comments, generally

agreeing with the accuracy of the information. Officials in Arizona

commented that the draft report seemed to suggest prepaid managed care

is not suitable for people with disabilities. We believe, instead, that given

the limited state and health plan experience with serving disabled

individuals in prepaid care and the medical complexity of their health care

needs, careful attention is required in designing, implementing, and

monitoring programs for this population.

In addition to requesting comments from HCFA and state agencies, we

provided the draft report to several independent researchers from the

National Academy for State Health Policy, the Medicaid Working Group,

MEDSTAT, and Fox Health Policy Consultants. These researchers

generally agreed with the accuracy and comprehensiveness of our

Page 63 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Chapter 5 

Observations, Conclusions, and Comments

presentation of the issues and programs. We incorporated technical and

clarifying comments from states and external researchers as appropriate.

Page 64 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Page 65 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
Appendix I 

Major Contributors to This Report

Kathryn G. Allen, Assistant Director, (202) 512-7059

Cheryl A. Williams, Evaluator-in-Charge, (503) 235-8451

Deborah A. Signer

Stanley G. Stenerson

Mark D. Ulanowicz

(101389) Page 66 GAO/HEHS-96-136 Medicaid Managed Care for the Disabled
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