Healthcare reform didn't die in Washington. It just shifted to the states in the form of Medicaid reform.
One of the last payers to embrace managed care, the $40 billion Medicaid acute-care program is making up for lost time.
Long a crazy quilt of state programs, Medicaid is a complex reimbursement system that has been the domain of state actuaries and payment specialists. "When I explain Medicaid, their eyes (glaze over)," said David Marwitz, vice president of government relations for the Texas Hospital Association, talking about audiences for his speeches on Medicaid.
Now, however, Medicaid is becoming a battering ram for managed care as states gain federal approval to put their billion-dollar programs into the hands of risk-taking HMOs. The programs operate under catchy names such as TennCare (Tennessee), Health Quest (Hawaii) and KenPAC (Kentucky).
Faced with a $1.1 billion annual shortfall in its $10 billion Medicaid program, Texas last month took a giant step toward disassembling its DRG-based Medicaid system and pushing the entire program into managed care. The move was approved by a Senate committee but still needs legislative approval this spring.
If approved, it would be the largest effort yet by a state to embrace a concept that critics charge is largely untested, especially in a state as large and diverse as Texas.
John Boff, executive director of the Texas Organization of Rural and Community Hospitals, concurs. He says rural hospitals worry they will be left out of what they see as "a regional approach that starts with tertiary-care hospitals."
Yet momentum is on the side of legislators as dozens of states move to sweep their Medicaid and uninsured populations into single-payer managed-care systems.
So far, nine states have received waivers from HCFA to operate managed-care Medicaid programs. Six others have applied for waivers and await approval, and nearly a dozen more are considering filing waiver requests. Waivers allow states to design their own eligibility rules, expand coverage to enroll the uninsured and require enrollees to stay with a plan for more than six months. Waiver approval can take just six months, but some states fear the procedure will lengthen as HCFA is inundated with requests.
The number of Medicaid beneficiaries in managed care nearly doubled in the past year, to 7.8 million, HHS reported last month. The department said 44 states have some component of managed care, either large or small, in their Medicaid programs.
Providers are anxious, and for good reason. The ball is rolling so quickly toward managed care that they're afraid important details-such as payment rates-may not get the attention they deserve.
In South Carolina, the Palmetto Health Initiative is that state's version of Medicaid managed care. The plan is expected to quadruple the number of state residents in managed-care plans, to 470,000.
Despite concerns about the state's underfunded Medicaid program, "a number of hospitals are looking at cutting their teeth on Medicaid managed-care contracts," said James Head, senior vice president of the South Carolina Hospital Association.
Unfortunately, providers have little choice. "There's no turning back," Head said, noting HCFA's conditional approval of the Palmetto initiative.
States want to cut Medicaid spending or at least spending increases, but they also want to expand access to greater numbers of uninsured residents. Although the mathematics of the strategy often seem questionable, supporters argue that managed care is the magic bullet that can make the calculation work.
In Texas, DeAnn Friedholm, the state's Medicaid director, is one of many who believe managed care can achieve both ends. Medicaid beneficiaries overuse hospital emergency rooms because they don't have primary-care physicians. Medicaid pays $79 for a hospital emergency room visit, $29 for a physicians' office visit. Which is more cost-effective?
Obviously, under managed care hospitals should expect less inpatient business from Medicaid. In instances where Medicaid is not covering its costs, that's good. However, in some states the loss of inpatient business robs hospitals of revenues used to pay fixed costs.
For example, in Maryland, Medicaid beneficiaries in Baltimore's Chesapeake Health Plan account for 300 inpatient days per 1,000, said Ken Melkus, president and chief executive officer of HealthWise, a Nashville, Tenn.-based HMO that operates the plan. For Medicaid beneficiaries intraditional plans, the rate is 850 inpatient days per 1,000, he said.
Having the Medicaid business "also gives us enhanced leverage to negotiate with providers, so it accrues to the commercial business," Melkus said. He called Medicaid "a tremendous growth opportunity."
Indeed, publicly funded companies such as HealthWise are behind much of the momentum in Medicaid managed care. By 1997, Medicaid managed-care plans are expected to add 10 million new HMO enrollees, according to estimates by Robertson Stephens & Co., a San Francisco-based investment banking firm. The trend could represent a $50 billion increase in revenues for HMOs from 1995 to 2000, the firm reported.
According to a Group Health Association of America survey, 7% of HMOs developed new Medicaid plans in 1994. This year, 27% plan to do so.
"Medicaid is probably one of the best demographic groups to go into managed care," said Thomas Hodapp, healthcare analyst with Robertson Stephens. "It's highly overutilized, and the clinical pathways are far from optimal."
That spells profits for HMOs.
HMOs are so anxious to tap states for Medicaid contracts that they're making large problems look surmountable.
Take the lack of primary-care physicians, an essential component of Medicaid managed care. In South Carolina, out-of-state HMOs "have indicated to the state that, if necessary, they'll bring in their own doctors," Head said.
That type of talk arouses the interest of state budget officers who recently reported that Medicaid grew to 18% of state spending in 1993 from 10% in 1987.
Combine that with cutbacks in disproportionate-share funds, which pay hospitals that care for the poor, and states are facing fiscal woes.
Disproportionate-share payments totaled $17.4 billion in 1992, and because of changes in the federal formula they dropped to $16.7 billion in 1993. They're expected to keep dropping, and the Clinton administration has advocated stopping the program entirely.
Louisiana provides perhaps the best example of a state attempting to rush into managed care to solve a fiscal crisis brought on by a drop in disproportionate-share money.
Louisiana leads the South in spending per Medicaid recipient-$3,275, according to state officials. However, recent reports indicate state taxes paid just $100 million of Louisiana's $4.4 billion Medicaid budget. Through various matching formulas and an inordinate amount of disproportionate-share money, the state received some $4 billion from the federal government.
State officials hope approval of a Medicaid waiver will help Louisiana negotiate a continuation of that level of subsidy, or at least most of it. The state filed for the waiver late last month.
"We haven't had a hospital close in this state in five years," said Jim Dixon, vice president of the Louisiana Hospital Association. "Some of them are only afloat because of" disproportionate-share funds.
Although the hospital association has deep concerns about state government sweeping the Medicaid system into managed care through a waiver, they feel they have no choice but to go along. "We endorsed the waiver request. If we don't we're going to lose $3 billion," Dixon said.
Louisiana doctors are also skeptical and have asked the state to privatize Medicaid through a voucher system instead.
Last month, the Louisiana State Medical Society's House of Delegates unanimously passed a resolution saying that a Medicaid managed-care system would be the "wrong solution" for Louisiana's Medicaid problems. The society represents two-thirds of the state's 9,500 physicians.
Like their colleagues in Louisiana, some Texas physicians favor giving
Medicaid recipients a choice among a medical savings account, an HMO or a fee-for-service plan.
Brant Mittler, M.D., a San Antonio physician, told a Texas Senate committee last month the state would incur massive problems for incidental savings if it adopts Medicaid managed care. Last year, the state authorized two pilot projects for Medicaid and used statistics from them to show that utilization dropped.
But Mittler argued length of stay dropped at hospitals throughout the state in the absence of Medicaid managed care. "It is patently dishonest for your (legislative) staff and Lewin-VHI to claim that Medicaid HMOs are responsible for more efficient care," he said. Lewin-VHI, a Fairfax, Va.-based research firm that has carved out a niche in Medicaid research for state governments, prepared a 300-page report for the state in mid-November of last year.
That report included extensive analysis of various Medicaid managed-care systems, their costs and potential savings.
But it's hard for governments and providers to know what to believe. TennCare, a Medicaid managed-care system begun a year ago, is either the best or the worst thing to happen to the state, depending on who's talking.
Tennessee state officials have hailed its success in enrolling the uninsured. Physicians have sued to stop it, which sums up their opinion, and beneficiaries also have complaints about TennCare.
In October 1994, former HHS Secretary Louis Sullivan, M.D., criticized the program at a conference in Memphis, Tenn., but state officials dismissed the remarks, noting that Sullivan serves on the board of Pfizer, a New York-based pharmaceutical firm. Pfizer has been battling the state to get approval of two drugs for TennCare patients, they said.
All these problems have states such as Texas groping for an answer. State Sen. Mike Moncrief serves on the Senate committee that voted to go forward with a managed-care system for Medicaid.
Finding a system that works for Texas might be difficult, he acknowledged. When asked about Arizona's apparently successful track record, he responded, "Arizona has only 15 counties. We've got 254" (See story, p. 32).