Stateline Story

Managed Care Explained: Why a Medicaid Innovation is Spreading

  • May 31, 2011
  • By Christine Vestal
One of the most controversial state health initiatives this year is a plan in Florida to cut Medicaid costs by dramatically expanding the use of managed care. Florida lawmakers voted to move all Medicaid enrollees in the state — more than 3 million people who are poor, elderly or disabled — to commercial managed care programs.

Florida is not alone. At least a dozen other states are considering expanding managed care programs this year. That growth comes atop expansions in 20 states last year and 13 states the year before. Although most health care experts say managed care can improve care while lowering Medicaid costs, consumer advocates say states should proceed with caution.

Why do so many states want to put more Medicaid patients into managed care programs? What has been the states' experience with managed care so far? Here's a primer on how Medicaid managed care works and why so many states are turning to it now.

What is Medicaid managed care? First, here is what managed care is not: a traditional fee-for-service plan. That model, in which the state pays doctors and hospitals directly for each service they provide, remains prevalent in many state Medicaid programs. Critics of the fee-for-service model say it results in haphazard care for patients and allows providers to drive up costs by ordering unnecessary tests and treatments.

Under managed care, states sign contracts with "managed care organizations," or MCOs, that provide medical services through their own networks of doctors and hospitals. The state pays the MCO a fixed annual fee for each Medicaid patient. And the MCO takes responsibility for overseeing each person's care. The MCO's goal is to keep patients as healthy as possible by encouraging them to get regular check-ups and inoculations while eliminating unnecessary procedures. This model of managed care is sometimes called "comprehensive care," or because of the fixed per-person cost, "capitated care." 

In rural areas where coverage of doctors and hospitals can be spotty, states have been using another type of managed care called "primary care case management." In this model, states pay doctors a monthly stipend for coordinating the care of Medicaid patients.

Is managed care new? No. Private employee health plans began moving to this model in the 1970s with the rise of health maintenance organizations, or HMOs. State Medicaid programs began making the switch in 1990. Then 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 since, as the steadily increasing cost of providing Medicaid has put pressure on states to find ways to save money.

How much are states using managed care now? According to the Henry J. Kaiser Family Foundation , states have enrolled 23 million people — about 40 percent of all Medicaid beneficiaries — with MCOs. Another 13 million, or 22 percent, are enrolled in primary care case management programs.

That's a much lower adoption rate than you find in the private sector — 98 percent of Americans who receive health insurance coverage through their employer are enrolled in some form of managed care, according to Kaiser. But Medicaid presents a more challenging population, with a disproportionate number of Medicaid enrollees who suffer from chronic illnesses, mental or physical disabilities and a growing number of frail elderly patients in nursing homes.

States started using managed care with Medicaid patients that are easier to treat: children, pregnant women and young parents. Elders and adults with severe disabilities have mostly remained under traditional fee-for service Medicaid plans. That is beginning to change. In fact, many of the expansions states are making now with Medicaid managed care are aimed at these smaller populations who are much costlier to care for.

The states currently using managed care the most include Hawaii (97 percent of Medicaid patients enrolled), Tennessee (94 percent) and Arizona (90 percent). Fifteen mostly rural states, including Alabama, Iowa and Maine, use no managed care at all. Among populous states, Illinois uses the least (8 percent).

Why are states expanding managed care? By contracting out, states can leave the complicated job of delivering and financing health care to experts. Like any other form of privatization, the idea is that private providers will do a better job than states can do on their own.

But the big driver at the moment is the fiscal crisis nearly all states are experiencing. Medicaid costs are growing so fast that the program has eclipsed K-12 education as the number one item states spend money on. There's almost no way states can close massive budget gaps without squeezing big savings out of Medicaid. Managed care's fixed costs allow states to know for sure that their Medicaid bill will be no higher than what they've budgeted.

Is the federal health care overhaul a factor? Yes. The law prevents states from slashing their Medicaid rolls. So expanding managed care is one of the few options states have to make a big dent in their Medicaid costs. At the same time, states are preparing to cover 16 million more people through Medicaid starting in 2014 when key provisions of the law kick into place. So they are trying to find more cost-effective ways of serving more people.

The Affordable Care Act also offers financial incentives for states to offer primary care case management in rural areas. Under the law, the federal government will pay 90 percent of the costs for so-called "health homes," a type of this approach that is specifically designed to care for people with chronic health conditions.

Why is managed care controversial? For as long as managed care has been around, some have complained that it does more to hold down costs than it does to provide quality health care. Critics say MCOs — at least the for-profit ones (some are nonprofits) — have an incentive to offer skimpy services and deny procedures in order to boost profits. Health care providers also complain about low reimbursement fees and excessive amounts of paperwork.

The people who run Medicaid programs in the states generally support the use of managed care to improve service and control costs, according to Matt Salo, executive director of the National Association of Medicaid Directors. But state lawmakers — sensitive to the complaints of consumers and the medical community — have been mixed in their support of the plans.

Is there a down side for states? Some states have had trouble getting health care providers to participate in managed care, particularly in rural areas. Another challenge for states is setting so-called "capitation rates." Those per-person fees need to be generous enough that MCOs can attract doctors and hospitals to participate, but not so high that states end up losing money on the deal. States also have had problems with MCOs that fail to live up to their contracts or choose not to renew. During a five-county pilot program in Florida — a program that Florida is now building upon with its new law expanding managed care — several MCOs opted to not continue their contracts, requiring Medicaid patients to find new doctors.

Patient advocates generally oppose the states' recent move to managed care for disabled and elderly people. They say the change could disrupt services to this vulnerable population and the complex care they need does not lend itself to easy cost cutting.

Are all Medicaid managed care plans the same? No. States have taken a variety of approaches to managed care.

One way states vary is by the type of benefits they include under managed care contracts. States often exclude prescription drugs, for example, because states get special rebates that have not been available to MCOs. But under the Affordable Care Act, drug companies must make those same discounts available to health groups that contract with states.

Some states carve out mental health, drug and alcohol rehabilitation, dental and vision coverage under managed care. Other states, however, include in managed care all of the services that they traditionally provide under Medicaid.

Another big difference is whether managed care is mandatory or optional. Many states give Medicaid recipients a choice of one or more managed care plans, plus a traditional fee-for-service option. As states expand managed care, a growing number are making it mandatory.

Finally, some states offer managed care in only certain parts of the state, although most expand the arrangement to the entire state once it has proven successful.


Do managed care plans really save money for states? The evidence generally suggests yes — although the experience varies widely by state. A study by The Lewin Group, a health care consultancy, shows that states that have tried some form of managed care have saved between 0.5 percent and 20 percent from their anticipated costs. The group's 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 all studies are so favorable, however. A Georgetown University Health Policy Institute study of Florida's five-county pilot program concluded that it "yielded little in the way of concrete evidence of either efficiencies or cost reductions." Nevertheless, Florida is counting on rolling out the same program statewide to save the state budget more than $1 billion per year.