Enacted in 1965 as title XIX of the Social Security Act, Medicaid is a federally aided, state-administered medical assistance program. At the federal level, the program is administered by the Health Care Financing Administration (HCFA), an agency within the Department of Health and Human Services. Within broad federal guidelines, each state designs and administers its own Medicaid program, which HCFA must approve for compliance with current law and regulations. HCFA is also responsible for providing program guidance and oversight to the state programs. Nationwide, Medicaid served approximately 34 million low-income people in fiscal year 1994, with combined federal and state expenditures of $143 billion. California established its Medicaid program, named Medi-Cal, in 1965. The cost of the Medi-Cal program was estimated to be about $15 billion in federal and state funds in fiscal year 1994, serving about 5.4 million people. The California Department of Health Services (DHS) is the agency responsible for administering the Medi-Cal program. It determines policy, establishes fiscal and management controls, contracts with managed care health plans, and reviews program activities. California has over 20 years of experience with Medi-Cal managed care programs. DHS began contracting with Prepaid Health Plan (PHP) pilot projects in 1968. Abuses and scandals plagued the early years of PHP contracting, resulting in beneficiaries being denied access to care. This led the California legislature to pass the Waxman-Duffy Prepaid Health Plan Act in 1972, which established standards for California Medicaid PHP contracts and for program administration. Controls have been continually strengthened over the years through amendments to the Waxman-Duffy Act. The Knox-Keene Health Care Service Plan Act of 1975 gave the California Department of Corporations authority to license and regulate fully capitated PHPs in the state. One Waxman-Duffy amendment made Knox-Keene licensure a prerequisite to obtaining a Medi-Cal PHP contract. With the advent of the Waxman-Duffy and Knox-Keene acts, the majority of then-contracting PHPs had to leave the Medi-Cal program because they failed to meet the new standards. Beginning in the 1980s, the state enacted several pieces of legislation authorizing the development and testing of alternative ways to deliver managed health care services to Medi-Cal beneficiaries. The first legislation, in 1981, authorized the development of pilot Primary Care Case Management (PCCM) programs. Subsequent legislation, in 1982, authorized County Organized Health Systems (COHS) and a Geographic Managed Care (GMC) program, and also permitted routine PCCM contracting. Medi-Cal managed care is currently built on a foundation of PHPs and PCCMs. Contractors are all paid on a capitated basis for the services they provide; that is, the state pays the managed care plan a monthly fee for each enrollee, and the plan assumes responsibility for the full cost of the services it has contracted to provide. PHPs are capitated to provide all basic benefits covered by Medi-Cal, excluding a few selected services such as organ transplants, chronic renal dialysis, long-term care, and dental care. The capitation fee is intended to equal DHS’ cost of providing the same services on a fee-for-service basis to an actuarially equivalent population. PCCMs are operated by physicians and other primary care providers who are capitated to provide all outpatient physician services and to manage all of the services provided to their enrollees. They may elect to provide certain additional services for an increased capitation fee. The capitation fee for PCCMs is set at 95 percent of the fee-for-service equivalent. All services not capitated are available to the PCCM enrollee on a fee-for-service basis. DHS rewards PCCMs for effective case management by paying them a percentage of the amount by which the state’s costs for the noncapitated services fall below the projected costs for an equivalent non-case-managed population. California also uses other managed care delivery systems. COHSs deliver health care to Medicaid beneficiaries in three counties—San Mateo, Santa Barbara, and Solano. A COHS is a local agency that contracts with the state Medicaid program to administer a capitated, comprehensive, case-managed health care delivery system. The COHS is responsible for administering claims, controlling utilization, and providing services to all Medicaid beneficiaries residing in the county. Beneficiaries in the COHS area must enroll in the COHS. They have a wide choice of managed care providers but cannot obtain services under the traditional fee-for-service system unless authorized by the COHS. All Medi-Cal services are arranged for by COHSs through subcontracts with providers. The state plans to have COHSs in two more counties—Orange and Santa Cruz—in 1995. California began a GMC pilot in Sacramento County in 1994. Under this project, the state contracts with several managed care plans to serve that county’s recipients of Aid to Families With Dependent Children (AFDC) population on a mandatory basis and other Medicaid beneficiaries on an optional basis. The state is planning an additional GMC project in San Diego County. Presently, approximately 890,000 Medicaid beneficiaries are enrolled in managed care plans in 20 of the state’s 58 counties. Table 1 shows enrollment by type of plan. Most of the managed care enrollments are voluntary; that is, each beneficiary may choose to receive care through either a managed care plan or the traditional fee-for-service system. In addition, in some counties, Medicaid beneficiaries have a choice of managed care plans. DHS monitoring and evaluation of Medi-Cal contractors consist of annual medical and periodic financial audits of all Medi-Cal managed care plans. DHS also performs periodic monitoring and oversight, including quarterly site visits to managed care plans by DHS contract management staff. Managed care plans are reviewed for compliance with federal and state regulations, with plan contract requirements, and with plans’ own procedures. The DHS Audits and Investigations Division conducts the annual medical quality assurance audits and the periodic financial audits (approximately every 2 years) of all Medi-Cal managed care plans. The medical audit focuses on plan performance in areas such as accessibility, continuity of care, quality assurance, personnel licensure, preventive services, grievances, and facilities and equipment. DHS contract management staff’s monitoring of managed care plan performance in terms of access and quality of care includes (1) investigation of complaints from beneficiaries, county welfare departments, beneficiary advocate groups, and providers; (2) review of disenrollments from plans; (3) review of emergency room visits by plan members; (4) follow-up of contractor corrective action plans for deficiencies identified in medical and financial audits; and (5) reviews of plan capacity and access. At the time of our review, DHS employed 17 contract managers. Each contract manager was responsible for one to three health plans. In addition to DHS’ periodic financial and medical audits, health plans involved in Medi-Cal managed care must undergo several other types of audits on a regular basis. These include the state Department of Corporations’ medical and financial audits of all health maintenance organizations (HMO); annual certified public accountant audits of health plans; and HCFA-sponsored biennial independent cost, access, and quality assessments of PCCMs and COHSs. Effective monitoring and oversight activities are critical to the success of any state Medicaid managed care program to ensure that beneficiaries have access to quality health care. However, a 1992 HCFA review found that DHS was not always able to manage and monitor its managed care program well enough to ensure that the health plans it contracted with were meeting all their responsibilities or that beneficiaries were receiving needed services in a timely fashion. Our review found three areas for continued concern. First, although DHS monitors managed care plans for compliance with their Medicaid contracts, it provides little guidance and training to those responsible for this important task. Second, the state does minimal review of plans’ provider financial incentives to ensure that they do not encourage inappropriately withholding health care services. Third, the state does little monitoring to ensure that services are actually provided through the Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) program, which focuses on preventive services for children. After its 1992 review, HCFA criticized DHS’ monitoring of managed care plans. Representatives of advocacy groups we interviewed also criticized DHS’ contract management capabilities and lack of enforcement activity. Although DHS often cites managed care plans for noncompliance with contractual obligations, advocacy groups said effective enforcement is not undertaken. A December 1994 study by the Center for Health Care Rights in Los Angeles concluded that Medi-Cal health plans with a history of poor care had not been penalized or forced to make improvements. The Center reviewed a sample of health plans’ medical audits over time and DHS activities after deficiencies were discovered. In its report, the Center expressed concern with the inconsistent application of deficiency ratings and the lack of DHS and health plan follow-up for serious quality of care problems found during an audit. Contract managers we interviewed expressed concerns of their own, including their inability to monitor managed care health plans on a proactive basis. They said that they dealt with problems brought to their attention but did not have time to anticipate, identify, and resolve emerging problems. Heavy workloads are one reason for this problem. After its 1992 review of DHS, HCFA cited the agency’s lack of staff as one reason for DHS’ inadequate monitoring, and an advocacy group we spoke with also said contract managers’ heavy workloads had an adverse effect on Medicaid beneficiaries’ access to quality health care. Although the state has added staff, a HCFA official told us that DHS has just enough people to keep current programs running and that heavy workloads remain a HCFA concern.