Kentucky's $2.5 billion Medicaid program is scheduled for a major overhaul next year when it begins contracting with two state university-led healthcare partnerships to provide capitated benefits to Medicaid recipients.
Like many of the 10 states experimenting with managed care for their Medicaid populations, Kentucky ultimately hopes to cut spending growth and increase access and quality. Four other states are awaiting HCFA approval for their programs.
But Kentucky's Medicaid plan differs from the other states' because only provider-based health plans are allowed to contract with the state rather than for-profit HMOs or insurers.
"We are demonstrating that not only can you put Medicaid under managed care and save money but that a provider-based entity can do it vs. a for-profit HMO or insurer," said Mark Birdwhistell, director of managed care and network development for University of Kentucky Medical Center in Lexington.
Under a waiver HCFA granted in 1995 allowing the state to develop a mandatory program for its 517,000 Medicaid recipients, Kentucky has divided the state into eight regions for managed-care contracting. Providers in each region will form "healthcare partnerships" that must include an HMO.
The first two regions, the Lexington and Louisville metropolitan areas, will begin serving 178,000 Medicaid patients in 1997. The other regions will be added by the end of 1998.
In the Lexington area, the University of Kentucky is facilitating development of a provider-led healthcare partnership that will serve a 24-county region with 75,000 Medicaid recipients. Last year, Medicaid spending for those patients totaled about $183 million.
After negotiating payments with the state, the contract is expected to begin in January, Birdwhistell said.
In the 14-county Louisville region, the Medical School Practice Association at the University of Louisville has been selected to organize a provider partnership. The region will serve about 103,000 Medicaid recipients with 1995 spending of $254 million. The partnership is expected to begin operations in May 1997.
The Kentucky Legislature mandated the two universities be at the forefront of the managed-care program because they rely so heavily on the Medicaid population for their teaching and research programs.
"We expect to decrease the fragmentation of services," said Richard Heine, manager of the state's Medicaid waiver program. "Fee-for-service creates a real incentive to provide a lot of services, not coordinated services."
Over the past four years, Kentucky has increased Medicaid spending 9% to $2.5 billion in fiscal 1996, which ended June 30, from $2.3 billion in fiscal 1993, a Medicaid spokesman said.
"We do not intend to spend less money (on Medicaid)," Heine said. "If we save any money, by law we must put it into an indigent-care trust fund to expand services and eligibility." HCFA requires states with Medicaid waivers to achieve "budget neutrality," which means Kentucky's new program cannot reduce overall spending.
However, the state hopes to slow the growth in its Medicaid program through its payment negotiations with the healthcare partnerships.
In Lexington, the provider partnership led by the University of Kentucky will use an existing provider-sponsored HMO to assume risk for the area's Medicaid population, Birdwhistell said. Several HMOs are being considered. The university also will discuss equity investments in the HMO by other participating providers to increase the health plan's capitalization to satisfy insurance department reserve requirements.
Meanwhile, the University of Louisville's 360-physician group practice has applied for its own HMO license under the name University Health Care. The group practice will raise the majority of the $7 million in capital needed to fund the HMO, said Robert Slaton, the practice's executive director.
In addition, two Louisville-based hospitals and a system-Jewish Hospital, University Medical Center and Alliant Health System-also are expected to contribute a significant amount, Slaton said. Several other providers are expected to become minority investment partners, he said.
"It is important for us to be a part of the process because there are multiple hospitals in Louisville involved with the university's teaching programs," said Stephen A. Williams, Alliant's president and chief executive officer.
For example, Alliant's Kosair Children's Hospital is the designated teaching hospital for pediatrics and serves a large Medicaid population, Williams said.
"We expect to receive less money on a per-unit basis (under the managed-care program)," Williams said. "There will be a continued incentive to be more efficient, develop appropriate infrastructures and work cooperatively rather than make redundant (delivery) models."
In October, the two universities are expected to select private companies to serve as health plan administrators for the partnerships, university officials said. The names of the companies submitting bids weren't available.
Because Kentucky has an "any-willing-provider" law, the regional healthcare partnerships formed to care for Medicaid patients must accept any qualified physician or hospital wishing to participate.
Pricing schedules for providers have yet to be developed, university officials said. A state spokesman said Kentucky's Medicaid program pays a "generous" rate that allows the providers to make a profit on Medicaid services.
Although Medicaid recipients are required to participate in the managed-care program, Slaton said they will be able to choose their primary-care physician. As a result, the emphasis in Kentucky is on improving quality and controlling use of services to become more efficient, Heine said.
"The competition between the providers will be on quality and efficiency," Slaton said. "To keep our 40% mix of Medicaid patients, (University of Louisville group practice physicians) know we have to become more efficient to manage the money and patients under capitation. Everyone will have an incentive to provide higher quality."