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 1995—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. 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, states 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 states—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. In 1996, the maximum allowable income was $470 per month for an individual and $705 for a couple. States have the option of extending eligibility to people who receive state payments that supplement SSI benefits; 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. For those who were eligible on the basis of physical disabilities, the main categories were diseases of the nervous system, sense organs, 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, SSI disability criteria for those 18 and younger have been based on developmental delays and limitations in ability to engage in age-appropriate activities. 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 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. 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. 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 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. In June 1995, almost 15 percent of all those who received Medicaid services were enrolled in prepaid managed care plans. 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. 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 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. Other conditions relate to such matters as the kinds of plans that can participate: They must be federally qualified or state-certified HMOs, 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—program and demonstration.Table 1.2 compares various characteristics of the two types of waivers.