Crushed by Medicaid Costs, States Expand Managed Care

Last week, Illinois Governor Pat Quinn signed a health care reform bill that will dramatically change the way many Medicaid patients receive care. The bill aims to push half of Illinois’ Medicaid caseload into the hands of managed care organizations by 2015.

Illinois has a long way to go to reach that goal: Only 8 percent of Medicaid patients in the state receive care this way now.

When he signed the bill, Quinn promised the reforms would reduce the state’s Medicaid costs by as much as $774 million over the next five years. The savings is supposed to come from shifting from a system in which the Illinois Medicaid program generally pays doctors for each service they provide, to one where the state pays insurers a set rate per year for each patient. Quinn also said Medicaid patients will see their health care services improve because insurers would be responsible for more carefully coordinating patient care to reduce avoidable hospitalizations and worsening of chronic conditions.

Illinois is late to the managed care phenomenon — on average, states already have moved 46 percent of their Medicaid caseloads into managed care. But in a year of tight budgets and rising health care costs, Illinois is only one of many states turning to the managed care model to squeeze savings out of Medicaid, which now consumes 22 percent of state budgets. This year, at least a dozen states are expanding managed care for Medicaid, the state-run health insurance program for low income children, pregnant women, the disabled and frail elders.

For example, South Carolina is planning to require nearly all of its Medicaid beneficiaries to enroll in a managed care plan starting in April. Washington State is planning to increase its share of Medicaid recipients in managed care from 60 percent to 85 percent by 2014. Texas and Virginia also are weighing sizeable expansions of Medicaid managed care. 

States have been using managed care to cut Medicaid costs for two decades. Up to now, however, the vast majority of plans covered only children and pregnant women — a large, but relatively healthy and inexpensive segment of the more than 60 million people covered by Medicaid.

What’s different today is that states are beginning to target new populations for managed care. They include adults with disabilities and seniors who require long-term care, relatively small groups that nevertheless account for the lion’s share of Medicaid costs. The hope is that more efficient care for Medicaid’s sickest and most expensive patients will result in even greater savings.

Just yesterday (February 3), this approach received a nod of support from the federal government. In a letter to the nation’s governors, U.S. Health and Human Services Secretary Kathleen Sebelius encouraged states to expand managed care to high-cost enrollees. ” Just one percent of all Medicaid beneficiaries account for 25 percent of all expenditures,” she wrote, noting that states don’t need any special permission from Washington to cut costs by creating “initiatives that integrate acute and long-term care, strengthen systems for providing long-term care to people in the community, provide better primary and preventive care for children with significant health care needs, and lower the incidence of low-birth weight babies.”

Managed care also has been a hot topic in discussions about reducing the federal debt. The Obama administration’s National Commission on Fiscal Responsibility and Reform recommends enrolling about 9 million low-income senior citizens in managed care — the so-called “dual eligibles” who qualify for both Medicaid and Medicare. According to the commission, the change “would result in better care coordination and administrative simplicity,” and save $44 billion by 2020. Another report, produced by the Debt Reduction Task Force , suggested the same idea, estimating the savings at $5 billion from 2012 through 2018.

The federal health care reform law does not necessarily push states to use what is known as comprehensive or capitated managed care, in which insurance companies share risk with Medicaid programs by agreeing to serve enrollees health care needs for a set price. But it does offer hefty financial incentives for states that offer a type of managed care called “primary care case management,” where doctors receive a monthly stipend for coordinating care for Medicaid patients, including preventive care, acute care and hospitalization. Under the Affordable Care Act, the federal government will pay 90 percent of the costs for so-called “health homes,” a type of primary care coordination designed to help reduce the costs of caring for people with chronic conditions.

That, in addition to the huge expansion of Medicaid required by the law — 16 million more people are expected to be covered by 2014 — is making managed care an increasingly attractive option for many states.

 Building momentum 

In the past, states backed away from managed care solutions for people with disabilities or elderly people who required long-term care, says Stephen Zuckerman, health policy analyst with the Urban Institute. “They required more specialized care than people perceived managed care plans were prepared to provide.”

But now, with more experience behind them, states are starting to put their costliest patients into managed care. “When you look at Medicaid spending, you have to look at those populations,” Zuckerman says.

States are finding other ways to expand managed care, as well. Some are adding behavioral health services and prescription drugs to plans that previously excluded them. Others are extending the geographical reach of managed care within a state by extending it to new counties and metropolitan areas. And others are going from making managed care a voluntary option for Medicaid patients to mandatory.

In Illinois, where Medicaid spending swallows one-third of general revenues, the state is trying a mix of strategies. Traditional capitated managed care will be part of the mix, but the state also plans to experiment with other risk-based financial arrangements, as well as so-called “pay-for-performance” plans in which health care providers are rewarded for improving health outcomes. Other programs in the works would encourage the use of evidenced-based medical practices, electronic medical records and primary care coordination.

Will it work? Experience from other states suggests that the savings will come — although the size of the savings varies widely. A study by health care consultants The Lewin Group shows savings from 0.5 percent to 20 percent in states that have tried some form of managed care. Their research also shows that managed care savings were biggest when applied to disabled populations. In Arizona, for example, 60 percent of its managed care savings over an 8-year period came from this high-cost group of patients.

 Not an easy change 

But moving Medicaid recipients into managed care can be difficult. Illinois, in fact, has some experience with the problems.

Early in 2010, Quinn called on the state’s Medicaid office to find private insurers that would provide managed care coverage for the state’s more than 35,000 disabled, blind and elder Medicaid recipients in the suburbs of Chicago. By June, two companies were selected — Aetna and Centene. Services were scheduled to begin January 1 of this year.

But so far, the insurers have been unable to sign up enough doctors and hospitals willing to participate in the plan. It is unclear whether the fees Illinois set are too low or whether doctors and hospitals are objecting to other terms of the contract.

Getting health care providers to participate has been a hurdle for managed care in other states, too — particularly in rural areas. Setting so-called “capitation rates” that are generous enough to attract doctors and hospitals, but not so high that states end up losing money is a delicate balance to strike.

In addition, advocates for disabled and elderly people have generally opposed the move to managed care for these populations. They say that vulnerable people should not have their access to care restricted by managed care organizations concerned about their bottom lines.

But proponents see big pluses — and not just on the cost side. “There are many advantages to Medicaid managed care,” says Margaret Murray, executive director of the Association for Community Affiliated Plans, a group of nonprofit insurers. “Greater care coordination, a focus on preventive and in-home care and less institutional care — all features of managed care — help explain why it is such a cost-effective system.”

In fiscal year 2010, 13 states expanded Medicaid managed care, according to an annual survey conducted by the Kaiser Commission on Medicaid and the Uninsured. In the budget year that ends this June, 20 states expanded managed care plans. Eleven of them added disabled and elderly populations, six included long-term care, and six moved from optional to mandatory managed care.

The evolution of managed care has been a steady process since 1990 when about 3 million Medicaid recipients started receiving services under managed care plans. In 1997, Congress passed a law making it easier for states to get federal permission to put Medicaid recipients under managed care. The momentum has continued, and Julia Paradise, associate director of the Kaiser commission, doesn’t expect that to end anytime soon.

“Nobody likes the fact that we’re spending as much as we are on health care and not getting better outcomes,” Paradise says. “There’s more and more commitment to policies aimed at spending our health care dollars as best we can to get good outcomes, better care and lower costs. The best managed care arrangements show that close management of chronic illnesses, coordinated care, and access to prompt care in appropriate settings can translate into gains in both health and spending.”