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Health Security
Act.
(b) Such programs are ones for advanced nurse education, nurse practitioners, nurse
midwives, nurse anesthetists, and other training in clinical nurse specialties determined by the
Secretary to require advanced education. Programs must meet the conditions defined in
sections 821, 822, and 831 of the Public Health Service Act.
Section 3062. Applicability of Part 1 Provisions. (a) The provisions of part 1,
apply to the graduate nurse training program under section 3061 in the same extent and
manner as they apply to the graduate physician training programs, except as they are
modified in this part. (b) For the purposes of this program, the council is the National
Council on Graduate Nurse Education. The council will make allocation of nurse training
positions in the same way as the Council on Graduate Medical Education does for physician
residencies.
Section 3063. Funding. The amount available for graduate nurse training programs
under this part is $200,000,000 annually, provided as direct transfers from the Treasury
under sections 3034, and 3104. Under section 4051, payments under Medicare for the costs
of approved educational programs other than direct graduate medical education costs are
specifically continued for cost reporting periods beginning on or after October 1, 1995.
PART 3 -- RELATED PROGRAMS
Section 3071. Programs of the Secretary of Health and Human Services.
(a) Authorizes to be appropriated $400,000,000 for fiscal year 1994 and each year thereafter,
for carrying out the programs described in this section, in addition to amounts otherwise
authorized to be appropriated for such programs. Requires the Secretary of Health and
Human Services to carry out the programs in this section.
(b) Establishes or expands existing programs with respect to training primary care
physicians and physician assistants, including programs to train additional numbers of
physicians and physician assistants; to retrain mid-career physicians previously certified in a
nonprimary care specialty; to expand the supply of physicians with special training to serve
in medically underserved areas; to expand service-linked educational networks for training in
community settings; to provide training in managed care, practice management, and
continuous quality improvement; and to enhance information on primary care workforce
issues.
(c) Establishes or expands programs with respect to training of underrepresented
minorities and disadvantaged persons, including programs to increase the number of such
persons in the health professions through financial assistance, recruitment and retention,
enhancing interest at the preprofessional level, and training of additional minority health
professions faculty.
(d) Establishes or expands programs with respect to training of nurses, including
training additional numbers of nurse practitioners and nurse midwives; baccalaureate nurses
Title III
113
for careers in teaching, community health service and specialized clinical care; nurse
clinicians and nurse anesthetists; and, school-based community nurses; also programs to
promote research on nursing workforce issues.
(e) Establishes a program to develop and encourage adoption of model practice
statutes for advanced practice nurses and physician assistants, and other to support efforts to
remove inappropriate barriers to practice by advanced practice nurses and physician
assistants.
(f) Establishes or expands programs with respect to training health professionals and
administrators in managed care, cost-effective practice management, continuous quality
improvement practices, and provision of culturally sensitive care.
(g) Authorizes the Secretary to carry out these programs through existing programs in
Titles VII and VIII of the Public Health Service Act.
Section 3072. Programs of the Secretary of Labor. (a) Authorizes to be
appropriated $200,000,000, for fiscal year 1994 and each year thereafter, for carrying out
the programs described in this section, in addition to amounts otherwise authorized to be
appropriated for such programs. Requires the Secretary of Labor to carry out the programs
in this section.
(b) Establishes programs to provide for skills upgrading and occupational retraining
(including retraining health care workers as technicians, nurses, and physician assistants) and
for quality and workforce improvement; to assist health care workers in career advancement;
to develop health worker job banks; to provide for joint labor-management decision-making
on workplace matters; and to facilitate the comprehensive workforce adjustment initiative.
(c) Requires the Secretary of Labor, in carrying out programs under this section, to
provide for specific skill requirements, internal career movement opportunities, employment
during retraining, evaluation and dissemination.
(d) Requires the Secretary, in carrying out programs under this section, to provide for
joint labor-management implementation and administration and discussion and consultation.
Section 3073. National Institute for Health Care Workforce Development.
(a) Requires the establishment of the National Institute for Health Care Workforce
Development jointly by the Secretary of Health and Human Services and the Secretary of
Labor.
(b) Authorizes the Secretary of Labor to carry out section 3073 through the Director
of the Institute.
(c) Requires the Director of the Institute to make recommendations regarding health
Title III
114
SUBTITLE E - HEALTH SERVICES FOR MEDICALLY
UNDERSERVED POPULATIONS
(H.R. 3600 and S. 1757 p. 578)
PART 1 - COMMUNITY AND MIGRANT HEALTH CENTERS
Section 3401. Authorization of Appropriations. (a) Authorizes funds in addition to
other authorized funds for community and migrant health centers.
(b) The additional funds authorized are $100,000,000 per year for each of fiscal years
1995 through 2000.
(c) These funds are in addition to other funds available for the centers.
Section 3402. Use of Funds The additional funds authorized may be used for any
purposes authorized under sections 329 or 330 of the Public Health Service Act as well as to
establish and maintain the financial reserves that are required under Title I for providers of
health services.
PART 2 - INITIATIVES FOR ACCESS TO HEALTH CARE
SUBPART A - PURPOSES; FUNDING
Section 3411. Purposes. The purposes of this program are:
(1) to improve access of medically underserved populations to health services
through a program of flexible grants, contracts and loans;
(2) to establish transition to a system in which medically underserved
populations have adequate choice of community-oriented providers and health plans;
(3) to promote the development of community practice networks and health
plans that integrate public and private health providers in underserved areas;
(4) to support linkages between provider of care to underserved populations
and regional and corporate alliance health plans; and
(5) to expand system capacity with additional practice sites and improvements
in health-care facilities in need of repair.
(6) to link providers in underserved areas with each other, regional health care
institutions and academic health centers.
(7) to support activities enabling underserved populations to gain access to and
effectively use the health care system.
Section 3412. Authorizations of Appropriations. For the development of
community health plans and networks there are authorized to be appropriated $200 million in
fiscal 1995, $500 million in fiscal 1996, $600 million for fiscal 1997, $700 million for fiscal
year 1998, $500 million for fiscal year 1999, and $200 million for fiscal year 2000. These
Title III
123
funds are in addition to other funds authorized for this program. Funds under this part are
also available for use under section 3692 (school health services).
SUBPART B - DEVELOPMENT OF QUALIFIED COMMUNITY
HEALTH PLANS AND PRACTICE NETWORKS
Section 3421. Grants and Contracts for the Development of Plans and Networks.
(a) The Secretary may make grants for developing qualified community health plans
and community practice networks. These plans and networks may be, in this title, referred
to as community health groups.
(b) To be a qualified community health plan, a health plan must be public or non-
profit private entity whose principal purpose is to provide the comprehensive benefit
package, in areas with shortages of medical personnel or to populations with a significant
number of medically underserved persons; the plan must be a member of one or more health
alliances; and two or more of the categories of providers specified in subsection (d) must be
represented in the plan.
(c) A qualified community practice network means a consortium of health care
providers that is a public or private non-profit entity whose principal purpose is to provide
services to underserved populations or in health professions shortage areas, which has an
agreement with one or more health plans and whose members are governed by a written
agreement. Two or more categories of providers in subsection (d) must be included in the
consortium.
(d) The relevant categories of providers described in subsections (b) and (c) are the
following:
(1) physicians or other health professionals or health care institutions providing
care in a shortage area or to an underserved population;
(2) migrant and community health centers;
(3) entities funded under sections 340 and 340A of the Public Health Service
Act (homeless health care providers and health care providers in public housing);
(4) entities furnishing health services under Section 1001 or Title XXIII of the
Public Health Service Act (family planning clinics and Ryan White program
providers);
(5) entities furnishing services under Title V of the Social Security Act
(maternal and child health);
(6) entities that are rural health clinics or federally qualified health centers;
(7) entities providing health services to Indians in urban areas under Title V of
the Indian Health Care Improvement Act or outpatient services to Indians through the
Indian Self Determination Act; and
(8) state or local public health agencies.
The Secretary also may make grants to a health plan that is not a community health
Title III
124
plan but that seeks to develop a community practice network with the entities described in
this subsection.
Section 3422. Preferences in Making Grants. In making grants, the Secretary shall
give the preference to those applications in which a maximum number of entities described in
section 3421(d) are represented and added weight if a large group also includes private
physicians, other health professionals or institutions that provide health services in a health
professions shortage area, or provide health services to significant numbers of ilndividuals in
medically underserved populations.
Section 3423. Certain Uses of Awards. (a) Awards under section 3421 may be
spent for the following purposes:
(1) planning the network or health plan, including entering into contracts;
(2) recruitment and compensation of health and administrative staff;
(3) acquisition and expansion of facilities;
(4) acquisition and development of information systems;
(5) other expenditures recognized by the Secretary.
(b) An award that includes funding for capital costs must obligate the recipient to the
United States for the amount of the award, plus interest during the 20 year period beginning
on the date of completion, if the applicant ceases to be a qualified health plan or network or
is sold or transferred to an entity that is not a community health plan or network.
Section 3424. Accessibility of Services. (a) Community health plans and networks
must assure that their services are available to persons seeking care, whether or not they are
eligible individuals under title I.
(b) A community health group's providers must be approved as Medicare and
Medicaid providers. A group must seek reimbursement for the cost of caring for persons
entitled to benefits under Title I, Medicare, Medicaid, any other public assistance programs,
or private health insurance plans.
(c) The network or plan must prepare a fee schedule that is consistent with local rates
and a corresponding schedule of discounts to be determined by a patient's ability to pay.
(d) The plan or network must maximize the accessibility of its services to residents in
its area by eliminating barriers resulting from geographical or demographic characteristics,
including limited ability of patients to speak English. A plan or network also must
periodically determine the accessibility of its services.
Section 3425. Additional Agreements. (a) Networks and plans must provide enabling
services (as defined in section 3461(g)) as part of their funding agreement.
(b) Networks and plans must maintain ongoing systems for patient-oriented,
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125
community-responsive quality control, and for collecting and making public information on
costs, health-care and financial performance, and other matters.
(c) The plan or network must agree to maximize its use of existing resources.
Section 3426. Submission of Certain Information. (a) The Secretary may make
grants only if applicants submit information on the needs (including the need for enabling
services) of the medically underserved population to be served by the applicant.
(b) The applicant must also include a description of how the applicant will design the
plan or network, a description of efforts to secure financial and technical assistance, and
evidence of significant community involvement in the initiation, development and ongoing
operation of the project.
Section 3427. Reports; Audits. Funded plans and networks must provide reports and
information as required by the Secretary and must submit to annual audits.
Section 3428. Application for Assistance. Applications must include the agreements
and information required in other sections of the subtitle and additional agreements and
information that the Secretary deems necessary.
Section 3429. General Provisions. (a) The Secretary may not make more than two
grant awards under section 3421 for the same project.
(b) The Secretary may determine the amount to be granted for any project.
SUBPART C - CAPITAL COST OF DEVELOPMENT OF
QUALIFIED COMMUNITY HEALTH PLANS AND PRACTICE NETWORKS
Section 3441. Loans and Loan Guarantees Regarding Plans and Practice
Networks. (a) The Secretary may make loans to public and private entities for capital costs
of developing qualified community health groups, and may also guarantee such loans by
Federal and non-Federal lenders.
(b) The Secretary shall use the same preferences in making loans that apply to grants
under section 3421.
(c) Funds under this section may be used to finance facilities, major equipment,
including information systems, to establish financial reserves and other capital costs that are
necessary to the purpose of the section (as determined by the Secretary). Priorities shall be
placed on loans to modernize facilities, prevent or eliminate safety hazards, and to repair or
replace obsolete facilities.
(d) The principal of the loan or loan guarantee, when added to other assistance under
Title III
126
this section, may cover up to 100 percent of the costs involved.
Section 3442. Certain Requirements. (a) The Secretary may approve loans only if
reasonably satisfied that the grantee can repay the loan, and only if the grantee provides
assurances that additional funds are available to complete the project for which the loan is
made. Also, a loan under section 3441 must be on the terms and conditions that are
necessary to protect the financial interests of the United States (as determined by the
Secretary).
(b) The Secretary may guarantee loans only if the loan conditions, terms and
arrangements for repayment are sufficient to protect the financial interests of the United
States. Such guarantees are also subject to further terms as determined by the Secretary.
(c) An applicant for a loan or loan guarantee must agree to use existing resources to
the maximum extent feasible.
Section 3443. Defaults; Right of Recovery. (a) The Secretary may take necessary
action, including waiver of regulatory conditions, deferral of loan repayments or other
actions as needed to prevent a default on a loan or loan guarantee. The Secretary may also
foreclose a loan in default, or waive, for good cause, any right of recovery from a borrower
who fails to make payments on a loan. A waiver of the right of recovery does not modify
the Secretary's obligation to make payments for a loan that has been sold and guaranteed.
(b) A loan becomes due and payable immediately if a facility for which loan funds
have been used is sold within 20 years after the federally-financed work on it is completed.
The loan becomes due if sale is to an entity not eligible for assistance under the section, or
not approved by the Secretary, or if the facility ceases to be a public or nonprofit private
entity eligible for assistance. The Secretary may also subordinate or waive the right of
recovery and any other Federal interest based on a loan or loan guarantee for capital
projects, if such waiver(s) would further the purpose of serving medically underserved
populations.
Section 3444. Provisions Regarding Construction or Expansion of Facilities. (a)
The Secretary may provide loans or loan guarantees for the construction, conversion
expansion or modernization of a facility, only if the applicant describes the facility site,
provides plans and specifications which meet the Secretary's requirements, and demonstrates
that title is vested in one or more of the applicants.
(b) An applicant for a loan must make the following agreements:
(1) Title to the site will be vested in one or more of the applicants;
(2) Adequate financial support is available for completing and maintaining and
operating the facility;
(3) The construction contract complies with the Davis Bacon Act (relating to
payment of laborers); and
Title III
127
(4) The facility will be available to persons seeking service there, regardless of
their ability to pay.
Section 3445. Application for Assistance. The Secretary may provide assistance only
if the applicant files the application in the form and manner prescribed by the Secretary.
Section 3446. Administration of Programs. The loans and loan guarantees for
capital projects must be administered from a centralized unit in the Department of Health and
Human Services.
SUBPART D - ENABLING SERVICES
Section 3461. Grants for Enabling Services. (a)(1) The Secretary may make grants
to qualified community health groups (plans and networks) and to other public and private
non-profit groups that provide services in one or more health professional shortage areas or
to medically underserved populations and are experienced in providing services to increase
the capacity of individuals to use health services. The grants are to be used to provide
enabling services.
(b) Enabling services are transportation, community and patient outreach, patient
education, translation services, and other services that would increase the capacity of
individuals to use the comprehensive benefits to which the Act entitles them.
(c) Grants may be made only if the applicant submits information demonstrating the
need for the services, a proposed grant budget and evidence of significant community
involvement in the project.
(d) Grant applicants must agree not to charge fees for grant-funded enabling services.
(e) Grant applicants must make maximum use of existing resources.
(f) Applications must be filed in a form and manner prescribed by the Secretary, and
include agreements and assurances deemed necessary by the Secretary.
(g) Enabling services are services described in subsection (b), when furnished by an
entity described in subsection (a).
PART 3 - NATIONAL HEALTH SERVICE CORPS
Section 3471. Authorization of Appropriations. (a) Funds for carrying out subpart
II of part D of title III of the Public Health Service Act, and section 3472 of the Health
Security Act, are authorized in the following amounts: $50,000,000 for fiscal year 1995,
$100,000,000 for fiscal year 1996, and $200,000,000 for each of fiscal years 1997 through
2000.
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128
(b) The authorizations are in addition to funds otherwise authorized.
(c) Funds may be appropriated under this section at any time before the fiscal year
for which they are appropriated.
Section 3472. Allocation for Participation of Nurses in Scholarship and Loan
Repayment Programs. Of amounts appropriated under section 3471, the Secretary shall
reserve such amounts as may be needed to ensure that of the aggregate number of persons
participating in the scholarship program or loan repayment program of the National Health
Service Corps (section 338A of the Public Health Service Act), the total proportion of
individuals being educated as or serving as nurses increases to 20 percent.
PART 4 - PAYMENTS TO HOSPITALS
SERVING VULNERABLE POPULATIONS
Section 3481. Payments to Hospitals. (a) The Secretary shall make payments to
eligible hospitals from funds made available under this part. The amounts specified in
subsection (b) must be made available to the Secretary on behalf of eligible hospitals, but
payment is not guaranteed to the state in which an eligible hospital is located or to any
individual receiving services from the hospital.
(b)(1) The total amount of the payments is $800,000,000 for the fiscal year in
which the general effective date occurs and for each subsequent year.
(2) For any year prior to the general effective date, the amount specified shall
equal the aggregate disproportionate share hospitals (DSH) percentage of the amount
otherwise available under this section. The aggregate DSH percentage is equal to the
percent of total payments to DSH hospitals in all states represented by the payments
to DSH hospitals in participating states.
(c) Hospitals qualifying for payments shall receive them for five years, without regard
to the first year in which a hospital receives payment.
(d) Payments shall be made on a quarterly basis.
Section 3482. Identification of Eligible Hospitals. (a) In order to qualify for
payments, a hospital must be located in a participating state. However, a qualifying hospital
may continue to receive payments even if the state in which it is located is no longer a
participating state.
(b) States shall identify for the Secretary those hospitals that meet the qualification
criteria.
(c) In order to qualify, a hospital must have a low income percentage caseload (as
defined in section 1923(b)(3) of the Social Security Act) during the base year of not less
Title III
129
than 25 percent.
Section 3483. Amount of Payments. (a) Of total amounts available for payment, 75
percent shall be allocated based on the hospital's low income percentage of the allocation for
the year.
(b) Twenty-five percent of the total shall be allocated to hospitals for services that
are not covered services under the Act. The Secretary shall develop an allocation
methodology.
(c) An eligible hospital's low income percentage shall equal the amount of all low
income days attributable to the hospital. Low income days equal the total amount of
inpatient days multiplied by the hospital's low income utilization rate under section
1923(b)(3).
Section 3484. Base Year. The base year is the year prior to the year of the general
effective date of this Act.
Title III
130
SUBTITLE F - MENTAL HEALTH; SUBSTANCE ABUSE
(H.R. 3600 and S.1757 p. 615)
PART 1 - FINANCIAL ASSISTANCE
Section 3501. Authorization of Appropriations. (a) Funds are authorized for the
purposes of this subtitle in the following amounts: $100,000,000 in fiscal year 1995;
$150,000,000 in fiscal year 1996, and $250,000,000 for each of fiscal years 1997 through
2000.
(b) Of amounts made available, the Secretary shall reserve as much as is deemed
appropriate for activities under section 3503. Of the remaining amounts, the Secretary shall
reserve 50 percent for activities described in subsection (a) of section 3502 and 50 percent
for activities under subsection (b) of section 3502.
(c) The amounts authorized above are in addition to any other funds authorized for the
same purposes.
Section 3502. Supplemental Formula Grants for States Regarding Activities
Under Part B of Title XIX of the Public Health Service Act. (a) The Secretary shall make
mental health grants to states that have submitted applications meeting the requirements of
subsection (e). The allotment formula shall be the same one used under section 1918(a)(2) of
the Public Health Service Act.
(b) The Secretary shall make grants for substance abuse services to states that have
submitted applications. The amounts of the grants are determined by using the formula
under section 1933(a)(1)(B)(i) and section 1918(a)(2)(A).
(c)(1) The Secretary shall approve grant uses that are consistent with the
mental health and substance abuse activities that are described in this section. The
state must agree to spend grant funds in accordance with the Secretary's approved
uses.
(2) Approved uses are as follows:
(A) transportation and translation, patient and community
outreach, patient education, and such other services as the Secretary
deems appropriate for the purpose of increasing the access of
individuals to services relating to mental health and substance abuse;
(B) improving the capacity of state and local service systems to
coordinate and monitor mental health and substance abuse services,
improving information systems, and establishing linkages between
mental health and substance abuse services and primary care providers
and health plans;
(C) providing incentives to integrate public and private systems
for treatment of mental health and substance abuse treatment systems;
and
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131
(D) any activity for which a grant may be made under sections
1911 and 1921 of the Public Health Service Act.
(d) As a condition of grant receipt, a state, may not reduce its funding for mental
health and substance abuse activities below the level spent in the fiscal year preceding the
first year for which the state receives the grant. The Secretary may waive this requirement
if the state agrees to spend the funds that would otherwise be subject to the requirement on
the developing community based care systems for the eventual integration of the public and
private systems for treating mental health or substance abuse (as applicable to the grant).
(e) The state's application must be submitted in a form, time and manner and include
agreements and assurances as required by the Secretary.
Section 3503. Capital Costs of Development of Certain Clinics and Centers. (a)
The Secretary may make loans and loan guarantees to public and non-profit private entities,
for the capital costs of developing non-acute, residential treatment centers and ambulatory
clinics.
(b) Priority must be given to loan and loan guarantees for centers and clinics in areas
with a health professions shortage or with significant numbers of medically underserved
individuals.
(c) Loans and loan guarantees shall be made only in accordance with procedures in
subpart C of Part 2 of subtitle E.
PART 2 - AUTHORITIES REGARDING PARTICIPATING STATES
SUBPART A - REPORT
Section 3511. Report on Integration of Mental Health and Substance Abuse
Systems.
(a) As a condition of being a participating state, each state must submit, not later than
October 1, 1998, a plan to achieve the integration of state and local mental health and
substance abuse services with services that are included in the comprehensive benefit plan.
(b) The state's report shall contain the following information:
(1) the number of persons served by state and local mental health and
substance abuse systems and the proportion who are eligible persons under title I of
the Act;
(2) services furnished to eligible persons, including each type of benefit
furnished, the diagnoses for which the benefits are furnished, the amount, duration
and scope of coverage of each benefit furnished, applicable limits on benefits, and
cost-sharing rules that apply;
(3) the extent to which mental health and substance abuse providers providing
services under a state plan participate in alliance health plans and reasons for any lack
Title III
132
of participation by these providers;
(4) the amount of revenues from health plans received by mental health and
substance abuse providers that do participate in health plans and that are funded under
one or more state program(s);
(5) the amount spent by the state and its political subdivisions in each of the
two years before it became a participating state, for items and services covered in the
comprehensive benefit package; also, the amount spent on medically necessary care
not included in the benefit package, including medical and other health care and
related supportive services;
(6) an estimate of the amount the state will need to spend on uncovered
benefits and services after mental health and substance abuse services are expanded in
the year 2001;
(7) a description of how the state will assure that all eligible individuals served
by state-funded mental health and substance abuse programs will be enrolled in a
health benefit plan and how mental health and substance abuse services not covered in
the benefit package will continue to be furnished;
(8) a description of the conditions under which integration of mental health and
substance abuse providers into health plans can be achieved and an identification of
changes in provider participation and health plan certification requirements that are
needed to achieve integration; and
(9) if integration is not medically appropriate or feasible for one or more
groups of individuals treated in state programs, a description of the reasons therefor,
and a plan for assuring coordination of care and services covered in the benefit
package and the state program for these people.
(c) Reports shall be submitted in a form and manner prescribed by the Secretary.
SUBPART B - PILOT PROGRAM
Section 3521. Pilot Program. (a) The Secretary shall establish a pilot program to
demonstrate model methods of integrating mental health and substance abuse services with
the mental health and substance abuse services covered in the comprehensive benefit package
under title I.
(b) In establishing the pilot program, the Secretary must consider the following
factors:
(1) the types of items and services needed by patients in addition to those
covered under Title I;
(2) optimal methods of treating persons with long term mental illness and
substance abuse conditions;
(3) the capacity of alliance health plans to furnish such treatment;
(4) necessary modifications in coverage and services furnished by health plans;
and
(5) the role of publicly funded providers in integrating acute and long-term
treatment.
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133
DOLE BILL
330A
State block grant program to create or enhance primary care services
provided to low income or medically underserved populations.
Funding Allocation
total funds = State need adjusted population (State FMAP) / national need
adjusted population (national FMAP)
need adjusted population = State population (need index)
need index = weighted sum of geographic percentage + poverty percentage
+ multiple grant percentage : general population percentage of State
geographic percentage = estimated population of State in non-urban areas
/ total national non urban population
non-urbanized population = 1 - urbanized population of State, expressed as
a percentage of total State population
poverty percentage = the estimated number of people in the State below
200% FPL / total number of people below 200% nationally
multiple grant percentage = amount of State funding recieved under 329
330, 340 / total funding recieved under these grants for all States.
(ceiling of twice the general population percentage and floor of less than
50% of general population percentage)
FMAP = 1- State matching percentage
State matching percentage = .25 (taxable resource % : need adjusted pop)
taxable resource percentage = total taxable resources of a State / total
taxable resources nationally
Purpose
Grants are to be used to deliver primary care services to people without
other access to those services in a cost effective, geographically
equitable manner.
321
Grants for technical assistance when establishing health networks and
plans in underserved areas.
LOOK AT 152 - 155
331
Loans to health networks, health plans covering individuals in rural,
frontier, or underserved areas, or health care providers serving rural,
frontier, or underserved areas
Assistance can be used for facility improvement (SEE 155 - 8)
341
Provision of a tax credit for primary health services providers.
The tax credit amount is equal to:
the number of months during the year that the taxpayer is a qualified
primary health services provider (1,000) or (500) if the person is not a
physician.
Qualified primary health services provider is anyone deemed by BPHC.
SAFETY NET
The Evolution
Of Support For
Safety-Net Hospitals
Changes in the medical care marketplace are placing funding
for uncompensated care and clinical education provided by
safety-net hospitals at risk.
by Linda E. Fishman and James D. Bentley
PROLOGUE: Teaching hospitals hold a special place in America's
pluralistic system of health care delivery and financing. They
are citadels of medical learning and institutions that care for
some of our most vulnerable citizens. But they also are the
places where much of the innovation that leads to medical
progress is conducted. Because teaching hospitals are complex
30
EVOLUTION OF
institutions that perform multiple missions, federal and state
SUPPORT
governments have woven a complex set of policies that seek to
balance public and private interests.
In this paper two veterans of federal health policy making
examine the rich history and current status of hospital support
for financing uncompensated care and graduate medical
education. Linda Fishman, who has a reputation in policy
circles as a level-headed realist, is associate vice-president in
the Office of Governmental Relations of the Association of
American Medical Colleges (AAMC). Fishman holds two
degrees from the University of Washington, where she was
elected to Phi Beta Kappa. Fishman recently produced a
monograph for the AAMC that is essential reading for anyone
who wants to understand the complexities of Medicare's
financing of graduate medical education. James Bentley, senior
vice-president of the American Hospital Association (AHA),
has been instrumental in shaping federal policy as it applies to
graduate medical education and hospital financing. Bentley
directs the AHA's public policy analyses as well as related
activities. He holds a doctorate in medical care organization
from the University of Michigan. He spent ten years at the
AAMC before joining the AHA.
HEALTH AFFAIRS
Volume 16, Number 4
c 1997 The People-to-People Health Foundation, Inc.
EVOLUTION OF SUPPORT
ABSTRACT: The federal government, mostly through the Medicare and Medicaid
programs, has created and maintained a set of structural mechanisms to sup-
port uncompensated care and clinical education: disproportionate-share hospi-
tal payments and direct and indirect graduate medical education payments. This
paper provides a history of how these traditional supports have evolved. We note
that the need to reduce federal and state spending threatens the level of these
payments, while changes in the health care delivery system highlight a range of
design and technical inadequacies in the current support mechanisms.
HROUGHOUT THE TWENTIETH CENTURY, the U.S. health
T
care system has supported uncompensated care and graduate
medical education (GME) through a complex patchwork of
revenue generated by patient care. Hospitals, the sites where most
uncompensated care and physician training occur, have traditionally
charged privately insured patients more than the cost of their hospi-
tal care. More recently, the federal government, through the Medi-
care and Medicaid programs, has created and maintained a set of
structural support mechanisms based on patient care payments to
help finance uncompensated care and health professions clinical edu-
cation, particularly GME. Now the health care system is transforming
from one based on a delicate web of confusing cross-subsidies to a
system based on price competition in which both private and public
SAFETY NET
31
purchasers want to pay only for the cost of the services their en-
rollees receive. Pressure to curb the rate of growth in state and
federal health care spending threatens to erode the existing public
support mechanisms for uncompensated care and GME.
The question in the current competitive environment is whether,
how, and to what extent society will continue to support the addi-
tional roles of hospitals that now are funded with patient care reve-
nue. Although other types of health care providers render uncom-
pensated care and participate in health professions education, most
of the public structural support mechanisms have been designed
specifically as institutional- or hospital-level payments. This paper
examines the history and current structure of hospital support for
financing uncompensated care, GME, and its related activities. Al-
sthough the competitive environment does not yet jeopardize the
hospital community overall, certain types of hospitals, which form a
safety net of care for the poor and/or provide GME and cutting-edge
research, are at risk.¹
A Historical Perspective
Care for the poor. The evolution of support for uncompensated
care and GME closely parallels the development of the hospital.
Hospitals in the United States, first built primarily for the poor,
were organized as charities under the sponsorship of religious or-
MEALTH AFFAIRS - July/August 1997
SAFETY NET
ganizations and wealthy patrons. By the late nineteenth century,
hospitals' orientation had changed from charitable institutions to
businesses as they began attracting patients from all socioeconomic
classes. Today, public, private, and proprietary hospitals all, to vary-
ing degrees, serve their communities and provide care to persons
who cannot pay.
Clinical education and medical technology centers. Some
hospitals also invest resources in a variety of other medical prod-
ucts. As scientific knowledge exploded in the twentieth century,
some hospitals developed close affiliations with medical schools,
becoming centers of advanced medical technology and providing the
settings for clinical education with organized teams of attending
physicians, residents, and students. In these institutions, commonly
known as "teaching hospitals," education and research are con-
ducted simultaneously with clinical hospital practice.
Financing: private and public. As hospitals evolved from
charitable institutions to complex business enterprises, their reli-
ance on patient care revenue increased. In 1922 patient care revenue
accounted for 65.2 percent on average of the total revenue of general
hospitals.² In 1994, after the growth of private insurance and intro-
32
EVOLUTION OF
duction of Medicare and Medicaid, 94 percent of hospital revenue
SUPPORT
on average was derived from services to patients.³
Payments from private payers indirectly assist hospitals in meet-
ing the costs of uncompensated care and GME-related activity. To
large and varying degrees, hospitals "cost shift," or obtain revenues
in excess of costs from one payer of service to offset shortfalls in
other categories.
Hospitals also rely on a set of publicly funded structural support
mechanisms (Exhibit 1). Some federally appropriated funds, accessi-
ble under Titles VII and VIII of the Public Health Service Act, sup-
port a variety of clinical education programs. Other appropriated
funds are available to hospitals to support certain at-risk popula-
tions, such as patients with acquired immunodeficiency syndrome
(AIDS), migrant workers, and the homeless, but the bulk of public
support is embedded in the Medicare and Medicaid programs.
Medicare makes special payments to hospitals, called dispropor
tionate-share hospital (DSH) payments, direct graduate medical
education (DGME) payments, and indirect medical education
(IME) payments, to maintain access to care for its beneficiaries and
to support GME and its related costs. The Medicaid program,
fi
nanced through a federal/state partnership, also makes DSH pay?
ments to hospitals to ensure access to care and, in many states,
supports GME and its related costs.
These public support mechanisms are in jeopardy for two real
HEALTH AFFAIRS Volume 16, Number 4
EVOLUTION OF SUPPORT
EXHIBIT 1
Public Structural Supports For The Health Care Safety Net
FY 1996
amount
(billions of
Type of support
dollars)*
Purpose
Mechanism
Medicare
Direct graduate medical
$2.4
Direct costs of graduate
Number of full-time-
education paymentsᵇ
medical education
equivalent residents
Indirect medical education
4.3
Differences in patient
Intern- and resident-
payments
care costs/access
to-bed ratio
Disproportionate-share hospital
4.3
Differences in patient
Supplemental
payments
care costs/access
Security Income and
Medicaid inpatient
days
Medicald
Disproportionate-share hospital
19.0
Assistance to hospitals
Varies
payments
for services to low-
income and Medicaid
patients
Clinical education payments
1.0+
Direct costs of graduate
Varies
medical education
and/or indirect patient
care costs related to
teaching
Federally appropriated fundsc
2.0
Varies
Appropriations/grants
SOURCE: Department of Health and Human Services.
NOTE: Medicare and Medicaid funding estimates are for fee-for-service spending and exclude amounts embedded in managed
care rates where applicable.
a
Medicare funding estimates from the Congressional Budget Office, January 1997 baseline. Medicaid disproportionate-share
hospital estimate is for 1995; see J. Holahan and D. Liska, "Where Is Medicaid Spending Headed?" (Washington: The Urban
Institute for The Kaiser Commission on the Future of Medicaid, December 1996). Medicaid estimate for clinical education
apending is for 1995; see D. Plumb and T. Henderson, Medicaid Funding of Graduate Medical Education: A Survey of the States
(Washington: The Intergovernmental Health Policy Project at The George Washington University, October 1995). Federally
appropriated funding levels from the Health Resources and Services Administration overview in the proposed U.S. federal budget
for FY 1998.
Includes payments for nursing and allied health training programs.
Includes those programs in Titles VII and VIII of the Public Health Service Act, Ryan White funds, consolidated health centers,
National Health Service Corps, rural health programs, and a few other programs.
sons. First, federal and state governments are seeking large targets
to help them meet increasing budgetary constraints, and these spe-
cial payments are substantial. Second, the structural support pay-
ments are based on fee-for-service payment systems and inpatient
use of hospital services. Managed care uses different payment meth-
ods, reduces hospital use, and moves care to lower-cost and ambula-
tory settings. This dynamic distorts and weakens the methodologies
calculating these hospital payments.
PALT AFFAIRS July/August 1997
SAFETY NET
Uncompensated Care
Amount. Hospitals and physicians traditionally have cared for
patients regardless of their ability to pay. In this paper, uncompensated
care is charity care and bad-debt expense. To a limited extent, all types
of providers provide some uncompensated care, but data on total un-
compensated care costs generally are available only from hospitals.
Hospitals provided about $16.8 billion in uncompensated care in 1994,
19 percent of which was offset by government subsidies.⁴
Current financing. Hospitals finance uncompensated care
through a variety of revenue sources. They may receive funds from
federal, state, or local grant programs for specific services or special
populations; philanthropies; gifts or their own charitable activities;
and earnings from the fiscal year. Public municipal or state-owned
hospitals receive state or local government appropriations, as do
some private institutions. The federal government, through the
Medicare and Medicaid programs, has implicitly supported uncom-
pensated care by targeting additional funds toward certain types of
hospitals that serve large numbers of poor persons. These payments
include two separate and distinct DSH adjustments: one under the
Medicare prospective payment system (PPS), and another under the
34
EVOLUTION OF
SUPPORT
Medicaid program. Some policymakers also believe that the current
level of the Medicare IME adjustment is justified by the uncompen-
sated care losses incurred by teaching hospitals.
Medicare DSH adjustment. In April 1986, with passage of the
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
(P.L. 99-272), Congress mandated an explicit payment adjustment
in the PPS for hospitals that serve large numbers of low-income
patients. It required no new money. Funding was obtained by low-
ering the basic rate paid to hospitals and decreasing the level of the
IME adjustment in recognition that teaching hospitals would re-
ceive a large proportion of DSH payments.
The original rationale for the DSH adjustment was to compensate
hospitals for the higher operating costs they incurred in treating
disproportionately large numbers of low-income patients. Several
studies, conducted by the Health Care Financing Administration
(HCFA) and the American Hospital Association (AHA), had dem
onstrated a relationship between higher Medicare costs and the
percentage of a hospital's patients covered by Medicare or Medic-
aid.5 A 1984 study by the Congressional Budget Office (CBO), based
on 1981 data, showed that certain groups of hospitals, particularly
those with relatively large shares of Medicaid patients, more than
100 beds, and large-city locations, would do worse, on average, un-
der the new Medicare PPS than would other hospitals, because
HEALTH AFFAIRS Volume 16, Number 4
EVOLUTION OF SUPPORT
their higher costs.⁶ By 1990 another CBO analysis of more recent
(1987) data showed that except for urban hospitals with more than
100 beds and the highest levels of service to the low-income poor,
the higher cost differences associated with serving the poor had
disappeared, and there was little justification for a DSH adjustment
based on differences in costs.⁷
However, the CBO noted another rationale for the DSH adjust-
ment. Congress had become increasingly concerned that certain
hospitals were at risk of closing as a result of treating large numbers
of poor patients and began to view the DSH payment as a mecha-
nism for mitigating hospitals' financial distress. Under this ration-
ale, DSH payments were justified because they aided hospitals in
maintaining access to care for low-income Medicare beneficiaries
and other patients. Today, most policymakers acknowledge that the
DSH adjustment is more a mechanism for channeling payments to
hospitals that serve a high proportion of poor patients than it is a
means of compensating hospitals for differences in operating costs.
Mechanics of the DSH adjustment. A qualifying hospital
receives a DSH payment for each Medicare patient it treats under
the PPS. The DSH payment is calculated as a percentage add-on to
the basic diagnosis-related group (DRG) payment. Different DSH
SAFETY NET
35
formulas are used, depending on where the hospital is located, how
many beds it has, and its status as a rural referral center or sole
community provider. The value of the hospital's DSH "index" deter-
mines the hospital's eligibility for a DSH payment and the size of the
payment. The index, whose definition has not changed since the
original legislation, is the sum of two ratios: the proportion of all
Medicare days that are attributable to beneficiaries of Supplemental
Security Income (SSI), a means-tested cash benefit program for aged
and disabled people, and the proportion of all patient days for which
Medicaid is the primary payer.8
Medicare DSH expenditures. Since its enactment in 1986, the
DSH payment has been modified in every budget reconciliation act
except OBRA 1993 (P.L. 103-66). Originally intended to sunset, the
adjustment was made a permanent part of the PPS in 1990. Each bill
added more money to the adjustment but not always to every cate-
gory of hospital. Legislation passed in 1990 (P.L. 101-508) added the
most money to the adjustment, almost $1 billion, through formula
modifications. Medicare DSH spending has increased almost four-
fold, from about $1 billion in 1989 to more than $4 billion in 1996,
and has grown faster than overall inpatient hospital payments.9 The
CBO estimates that Medicare DSH payments will total $4.5 billion
in fiscal year (FY) 1997, increasing to $4.8 billion in FY 1998.
As DSH spending has increased, so has the number of hospitals
HEALTH AFFAIRS July/August 1997
SAFETY NET
receiving DSH payments. In FY 1991, the Prospective Payment As-
sessment Commission (ProPAC), which monitors the PPS for Con-
gress, estimated that 1,558 hospitals, or 28 percent of all PPS hospi-
tals, received DSH payments." By FY 1996, ProPAC found that 1,957
hospitals, or 38 percent of all PPS hospitals, were receiving DSH
payments."
Although almost 2,000 hospitals receive this adjustment, Medi-
care DSH payments are highly concentrated. Ninety-three percent
of total DSH payments go to large hospitals in urban areas, and
teaching hospitals receive about 65 percent of all DSH payments.
Finally, because Medicaid eligibility and coverage vary widely
across states, Medicare DSH payments are distributed unevenly
across geographic areas: The Middle Atlantic, South Atlantic, and
Pacific regions account for 60 percent of all DSH payments but only
46 percent of Medicare discharges."
Medicaid DSH payments. The Medicaid DSH payment is
based on the assumption that certain hospitals, in addition to pro-
viding care to Medicaid enrollees, also serve indigent persons who
are not eligible for Medicaid and maintain many public health and
social services for all area residents. Legislators recognized that
36
EVOLUTION OF
these hospitals could not shift the cost of uncompensated care to the
SUPPORT
relatively few privately insured patients they serve. Congress took
action so that access to care could be maintained. OBRA 1981 (P.L.
97-35) required states to "take into account the situation of hospi-
tals which serve a disproportionate number of low income patients
with special needs" when setting inpatient hospital payment rates.¹⁴
At first, states were slow to establish-DSH payment adjustments,
but in the late 1980s the federal government stimulated the creation
of state DSH programs through legislation and regulation. In 1987
budget reconciliation legislation (P.L. 100-203), Congress estab-
lished minimum criteria for designating and paying DSH hospitals
and required states to designate every hospital that met those crite-
ria as a DSH hospital. States could be more generous in their desig-
nation criteria or in their payment levels. This led to great variation
across states and even among hospital types within states, as many
states went beyond the minimum criteria.
In the late 1980s and early 1990s, Medicaid DSH payments ex-
ploded. States became very creative in increasing their Medicaid
funding via provider-specific taxes, intergovernmental transfers,
and donations from hospitals as part of the state share of Medicaid
spending. These strategies increased federal payments to states
with little impact on state general revenue funds. For example,
providers, usually hospitals, would pay a tax or donate funds to the
state. The state would then use these funds to make Medicaid pay-
HEALTH AFFAIRS Volume 16, Number 4
EVOLUTION OF SUPPORT
ments and receive a matching payment from the federal government.
The federal government objected to this because it believed that the
mechanisms increased the federal contribution inappropriately.
In December 1991 Congress passed legislation, the Medicaid Vol-
untary Contribution and Provider-Specific Tax Amendments of
1991 (P.L. 102-234), as a compromise between the federal govern-
ment and the states. It restricted the types of provider taxes that
states could use and banned the use of provider donations. The law
also placed caps on DSH payments, limiting them to 12 percent of
program expenditures at both the national and state levels. States
whose DSH payments were more than 12 percent of state spending,
so-called high-DSH states, were frozen at 1993 levels until the rest of
their Medicaid expenditures grew so that DSH payments were 12
percent or less of Medicaid spending. States where DSH spending
was below 12 percent were allowed to grow at the same rate as the
rest of the Medicaid program. In 1993 Congress, responding to infor-
mation that some hospitals were receiving excess DSH funds and
that some states were diverting federal matching funds for purposes
other than health care, placed further restrictions on particularly
large Medicaid DSH payments to certain hospitals.
Current rules for Medicaid DSH payments. The 1991 and
SAFETY NET
37
1993 legislative provisions for Medicaid DSH payments remain in
effect. Federal matching payments for state Medicaid spending that
is financed with revenues from provider taxes continue to be
capped, and the 12 percent limit is still applied. States use a variety
of methods to make DSH payments, but all are tied in some way to
service for Medicaid enrollees and low-income persons.
Medicaid DSH expenditures. Between 1988 and 1992 Medic-
aid expenditures grew on average 22.4 percent annually, while DSH
spending grew a whopping 149.9 percent annually, from $400 mil-
lion in 1988 to $17.5 billion in 1992. 15 Legislative changes to the DSH
program in 1991 and 1993 moderated the growth of DSH payments
and overall program spending. Between 1992 and 1995 Medicaid
DSH spending grew only 2.7 percent per year, increasing to $19
billion by 1995, considerably slower than the overall growth of the
Medicaid program, which had dropped by then to 9.5 percent per
year. 16 As a result, whereas in 1992 DSH payments were 14.6 percent
of all Medicaid spending, in 1995 DSH payments had dropped to
about 12 percent of total Medicaid spending.
Other federal government support. The federal government
provides support for special populations through certain programs
in the Health Resources and Services Administration (HRSA).
Without the availability of federal funds for programs such as the
Ryan White AIDS program, migrant health centers, and health care
HEALTH AFFAIRS July/August 1997
SAFETY NET
for the homeless, hospitals would have to fund such activities with
other revenues obtained through cross-subsidization. These feder-
ally appropriated funds, about $2 billion in FY 1996, are available to
the health care system through grants and appropriations."
Nonfederal government support. Another important source
of support for uncompensated care is state and local government
appropriations. State, county, or city tax dollars may be the primary
source of funds for certain types of hospitals, such as public general
hospitals. Data on appropriations are difficult to collect at the na-
tional level, but among members of the Council of Teaching Hospi-
tals and Health Systems (COTH), twenty-three public municipal
teaching hospitals reported receiving $1.7 billion in state, county,
and city support for indigent care and general operations in FY
1995. Another thirty-eight state-owned public teaching hospitals
received $700 million from state and county appropriations for indi-
gent care, general operations, and medical education purposes.
Clinical Education
Medical education in the twentieth century has been intertwined
with care for the poor, particularly in public hospitals where medical
38
EVOLUTION OF
education programs have provided a workforce for care of indigent
SUPPORT
patients. Until the 1960s residents gained their primary clinical expe-
rience in public hospitals and on the charity wards of voluntary
hospitals. In the mid-1960s and 1970s enactment of the Medicare and
Medicaid programs sharply reduced the number of indigent patients,
and GME changed, expanding training to other clinical settings.
However, since the clinical component of medical education involves
students and residents in the direct diagnosis and treatment of pa-
tients, and the poor have represented a substantial portion of pa-
tients cared for in educational settings, many view support for GME
as support for uncompensated care in underserved communities.
The cost of clinical education. Teaching hospitals, which
sponsor GME programs, incur significant direct and indirect costs
in operating physician training programs. The direct costs consist of
stipends and fringe benefits for residents, salaries and fringe bene-
fits for supervising faculty, costs directly associated with support-
ing the GME program (such as the clerical personnel working exclu-
sively in the GME administrative office), and allocated institutional
overhead costs (such as maintenance, cafeteria, and depreciation).
Indirect costs are those incurred in providing an appropriate en-
vironment for clinical education. They include the higher patient
care costs that accompany an academic infrastructure because
teaching institutions tend to treat a much higher proportion of se-
verely ill patients who require intensive resources. Teaching hospi-
HEALTH AFFAIRS Volume 16, Number 4
EVOLUTION OF SUPPORT
tals also maintain a broader scope of highly specialized services and
stand-by capacity, often on an around-the-clock, regional basis.
Higher patient care costs also may result when a teaching program
is located, for example, in the central core of a large urban
area-where labor, land, and operating costs may be higher than in
the suburbs. Finally, indirect costs include the reduced productivity
of the hospital staff because they are educating residents and the
processing of additional diagnostic tests or ancillary services that
residents may order during their clinical learning experience.
Current support for clinical education. Support for clinical
education comes from many sources, but most of it comes from
hospital patient service revenue, such as payments from individuals;
third-party payers, such as commercial insurance companies;
government-financed programs, such as Medicare and Medicaid;
and state and local appropriations. Fees from faculty physician prac-
tices, foundation grants, grants from the National Institutes of
Health, and other diverse nonhospital sources, in addition to the
Departments of Veterans Affairs (VA) and Defense, also support
GME. The VA is the largest single provider of physician training
sites in the United States today and funds about 9 percent of all
residency positions each year at about 130 VA medical centers.
SAFETY NET
39
Because the Medicare program makes two explicit payments to
teaching hospitals for their direct and indirect costs, many persons
mistakenly believe that Medicare is the only payer of GME-related
costs. Other purchasers of health services also participate in GME
financing. Medicaid makes payments through a variety of explicit
and implicit mechanisms. Private insurance companies contribute
implicitly to direct and indirect GME costs by paying higher prices
than these companies would pay to nonteaching hospitals.
Medicare DGME payments. Medicare DGME payments com-
pensate teaching hospitals for the costs that are directly related to
the graduate training of physicians, dentists, and podiatrists.¹⁹
Medicare does not pay the costs of clinical undergraduate medical
education, although it occurs in teaching hospitals, usually along-
side and intertwined with residency training. In establishing Medi-
care in 1965, Congress recognized the need to support residency
training programs to meet the nation's need for fully trained health
care professionals and acknowledged that educational activities
heighten the quality of care in hospitals.²⁰
Mechanics of the DGME payment. From 1965 until 1985
Medicare paid its share of each hospital's historical DGME costs.
Reimbursement was open-ended: If a hospital increased its costs,
Medicare paid its share of the costs incurred. However, COBRA
1985 dramatically changed the DGME payment methodology in
HEALTH AFFAIRS - July/August 1997
SAFETY NET
April 1986 by uncoupling the link between costs and payments.
Today, Medicare pays a portion of a hospital-specific per resident
amount, which is updated annually by an inflation factor. These
total per resident amounts vary widely, and in the FY 1984 or FY
1985 period on which the per resident amounts are based, they
ranged from $20,000 to more than $100,000. Medicare pays a per-
centage of the per resident amount based on its share of total inpa-
tient days in each hospital. In recent years the per resident amount
has been adjusted to pay a higher rate for primary care residents.
The COBRA legislation also limited the number of years for which
Medicare would fully support its share of residency training, and in
August 1993 Congress made additional changes. Today, after the
period required for a resident's initial board certification in a spe-
cialty, Medicare pays only 50 percent of its share of the per resident
amount. The program imposes no limit on the number of residents it
supports, either at an individual hospital or in the national aggregate,
as long as the residents are enrolled in an approved training program.
Hospitals may receive payments for residents who are graduates of
U.S. medical, osteopathic, dental, and podiatric schools and for train-
ees who have graduated from foreign medical schools.
40
EVOLUTION OF
Medicare DGME expenditures. According to CBO estimates,
SUPPORT
the Medicare DGME payment totaled about $2.4 billion in FY
1996.2 Included in this estimate are about $300-$350 million in
payments to hospitals for a portion of the direct costs of hospital-
based nursing and allied health professions education.
The Medicare IME adjustment. The IME adjustment, part of
the Medicare PPS, compensates teaching hospitals for their higher
Medicare inpatient operating costs relative to nonteaching hospi-
tals. The roots of the IME adjustment lie in the limits placed on
routine hospital costs in the 1970s. Even though Medicare initially
reimbursed all Medicare-allowable hospital costs, the federal gov-
ernment soon imposed limits on acceptable costs. Section 223 of the
Social Security Amendments of 1972 (P.L. 92-603) authorized the
secretary of health, education, and welfare to set payment limits on
routine inpatient hospital costs. The cost limits, intended to reduce
the variation in hospital costs acceptable to Medicare and the
method of setting them, evolved between 1974, when the regulations
were first published, and 1979. As the cost limits became more strin-
gent, federal policymakers and the teaching hospital community
expressed concern that teaching hospitals were being dispropor-
tionately harmed because the limits did not initially recognize the
costs associated with operating an educational program. Eventually,
teaching hospitals were permitted to remove their DGME costs
before determining whether their costs were below the limits.
HEALTH AFFAIRS - Volume 16, Number 4
EVOLUTION OF SUPPORT
The concept of indirect costs was recognized in 1980.² Govern-
ment researchers, in studying the relationship between hospital
costs and teaching status, found that even after removing DGME
costs, teaching hospitals more often reached or exceeded their cost
limits than nonteaching hospitals did. Researchers noted that a hos-
pital's intern- and resident-to-bed (IRB) ratio was related to an
increase in hospital costs. As a result, the Medicare routine-cost
limits for teaching hospitals were increased to incorporate a differ-
ential based on the IRB ratio in each hospital. In 1982 the adjustment
for teaching hospital costs was included in the extension of the
routine-cost limits to cover total hospital operating costs.
In December 1982, when the secretary of health and human serv-
ices proposed a new Medicare payment system for hospitals, the
resident-to-bed adjustment to the routine-cost limits was con-
verted to a PPS payment, the IME adjustment, to adjust for the
higher costs of teaching hospitals.23 The secretary's estimate indi-
cated that Medicare operating costs per case increased approxi-
mately 5.79 percent with each 10 percent increase in the number of
residents per bed. However, two months after the secretary's report,
the CBO presented an impact analysis showing that the proposed
DRG-based payment system would have adversely affected 71 per-
SAFETY NET
41
cent of teaching hospitals if the IME adjustment were set at the 5.79
percent level. The administration then suggested that the estimate
be doubled to 11.59 percent for each 10 percent increase in the IRB.
Congress supported this modification, and the IME adjustment was
incorporated into the prospective payment legislation.²⁴
As more information became available, the IME adjustment was
recalculated and lowered. The original adjustment of 11.59 percent
was reduced to 8.7 percent in 1986 when better data became avail-
able. However, the 8.7 percent adjustment factor was reduced by 0.6
percentage point to finance part of the DSH adjustment, resulting in
an IME adjustment factor of 8.1 percent during the time that the
DSH adjustment would be in effect. The 8.1 percent IME adjustment
recognized that teaching hospitals would receive a large share of
DSH payments. The current 7.7 percent IME adjustment, enacted in
OBRA 1987 (P.L. 100-203), took effect 1 October 1988.
Mechanics of the IME adjustment. For every Medicare case
paid under the PPS, a teaching hospital receives an additional pay-
ment. A teaching hospital's IME payment is determined by inserting
its IRB into a formula that is written in statute. In FY 1996 a hospital
with five residents for every 100 beds (IRB = 0.05) received a 3.77
percent add-on payment for each PPS case. A hospital with fifty
residents for every 100 beds (IRB = 0.50) received a 33.73 percent
add-on to its basic DRG payment.
HEALTH AFFAIRS July/August 1997
SAFETY NET
plans, the program pays 95 percent of an "up-front" monthly per
capita (capitation) amount (the adjusted average per capita cost
[AAPCC]) directly to the health plan. The plan's capitation pay-
ment includes what Medicare traditionally spends on DSH, DGME,
and IME payments under the fee-for-service payment system.
The managed care plan then contracts with hospitals and physi-
cians to provide services. However, instead of using Medicare fee-
for-service payment methods, the risk plan negotiates with provid-
ers, including hospitals. The rates that the plan negotiates with the
hospital do not necessarily include the DSH, DGME, or IME pay-
ments that would be made to the hospital if the beneficiary re-
mained in the fee-for-service system. Alternatively, the risk plan
may direct patients away from the teaching or DSH hospital to a
lower-cost site of care because the plan receives the same capitation
rate regardless of the provider with whom it has a contract. In either
case, under a risk contract, the teaching/DSH hospital would not
receive the DSH, DGME, or IME payment. These earmarked funds
may be used by the risk plan for purposes other than those intended
by Congress. Some policymakers and advocacy groups have pro-
posed separating the payments from the calculation of the managed
44
EVOLUTION OF
care rates and paying them directly to a teaching or DSH hospital
SUPPORT
when the facility serves a Medicare risk-plan patient.
Medicaid managed care programs pose the same problem. In gen-
eral, states set managed care rates using fee-for-service historical
claims data. Unless removed before calculating the health mainte-
nance organization (HMO) rate, hospital payments for DSH and
GME-related costs are included in the capitated rates the state pays
to managed care plans, which are not required to distribute the
funds to hospitals. A few states (New York and Michigan, for exam-
ple) have created mechanisms for "carving out" the GME-related
dollars from managed care rates.
Problems with current support mechanisms. The transfor-
mation of the health care delivery system highlights a range of design
and technical inadequacies with the current government-funded
support structures for uncompensated care and GME. These mecha-
nisms base the level of funding on measures of Medicare or Medicaid
inpatient hospital use. As states move Medicaid recipients into man-
aged care plans, the identification of these persons for purposes of
calculating both types of DSH payments under fee-for-service be-
comes more difficult. Because these payments use inpatient days or
discharges to distribute funds, managed care's emphasis on reduc-
ing inpatient utilization eventually will result in diminished public
support for uncompensated care and GME. Finally, these payments
are targeted only to hospitals when the delivery system is shifting to
HEALTH AFFAIRS Volume 16, Number 4
EVOLUTION OF SUPPORT
"Managed care's emphasis on reducing inpatient utilization eventually
will result in diminished support for uncompensated care and GME."
ambulatory sites of care and nonhospital providers.
To some degree, all support mechanisms use proxies rather than
direct measures. Medicaid activity represents service to the poor.
The number of residents in the IME's resident-to-bed ratio serves as
a surrogate for differences in inpatient operating costs. Because they
use proxies, the payments may not be targeted to the appropriate
institutions. In addition, the purpose of the payments may be com-
mingled, such as IME payments ensuring access to medical care.
Evolution of the competitive market. The transition to a
competitive health care market has additional implications for mu-
nicipal hospitals that traditionally have served the poor. As the mar-
ket constrains prices for all hospitals, Medicaid rates become more
attractive to other hospitals. Public hospitals that have relied on
Medicaid patients as sources of revenue must now compete with
private hospitals for these same patients. Municipal hospitals may
be unable to compete because they offer fewer amenities or have
SAFETY NET
45
more unattractive facilities or locations than their competitors have.
Under Medicaid managed care, former patients may seek or be di-
rected to other providers, leaving municipal hospitals with an even
less desirable patient mix. In response to the fragile situation of
these hospitals, local governments are making decisions to sell tax-
supported hospitals or further reduce their support.
Another sign of increased competition is the relatively recent
proliferation of niche providers, such as ambulatory surgical centers
or cancer management companies. Niche providers siphon off the
more profitable lines of traditional hospital services, leaving to hos-
pitals the responsibility of providing costly, often unprofitable, serv-
ices to very sick populations.
The competitive market also exposes the need to identify the
institutional costs related to clinical research and the provision of
community services, both of which traditionally have been funded
with patient care revenue. As with medical education, there are
added patient care costs and lost efficiencies because of the kind of
environment needed to conduct clinical research. Hospitals now
finance some research through contributions to medical schools,
which may support the conduct of unsponsored clinical research.
Finally, hospitals provide community services, ranging from poi-
son control to Meals-on-Wheels programs. These services are now
financed from patient care revenues, gifts, grants, and retained earn-
HEALTH AFFAIRS July/August 1997
SAFETY NET
ings and may be the first types of programs that hospitals reduce or
eliminate when confronted with financial difficulty.
Conclusion
In the changing medical care marketplace, if government is unwill-
ing to support the uncompensated care, clinical education, research,
and community service missions of hospitals, private payers will feel
comfortable avoiding these costs. No one opposes hospitals' provid-
ing these services, but few see a responsibility to pay a price differ-
ential to support them. In this environment government policies set
a benchmark for appropriate behavior and provide critical revenues.
Federal and state initiatives to control health care costs, balance
budgets, or extend trust funds place payments for uncompensated
care and clinical education at risk.
The missions of uncompensated care and GME will not be pre-
served simply by increasing hospital efficiency. New and modified
structures to finance uncompensated care and clinical education
must be developed to preserve these functions. Action today can
preserve the critical strengths of the U.S. health care system for
tomorrow. Support structures for these missions are easy to destroy
46
EVOLUTION OF
but costly and devilishly difficult to rebuild.
SUPPORT
The views expressed in this paper are those of the authors and do not necessarily represent
those of their respective associations. The authors acknowledge Richard M. Knapp and
several reviewers for their constructive comments. A portion of this paper was presented
at The Robert Wood Johnson/Health Affairs/Alpha Center conference, "What Is
Happening to the Safety Net?,"9 January 1997, in Washington, D.C.
NOTES
1. See L.E. Fishman, "What Types of Hospitals Form the Safety Net?" in this
volume of Health Affairs for a general description of safety-net hospitals.
2. Public appropriations, endowment income, donations, and other sources con-
stituted the remainder. See P. Starr, The Social Transformation of American Medicine
(New York: Basic Books, 1982), 161.
3. Personal communication from Lloyd Wackerling of the Trend Analysis Group
at the American Hospital Association (AHA), using data from the AHA's
Annual Survey of Hospitals, 1994.
4. Prospective Payment Assessment Commission, Medicare and the American Health
Care System, Report to the Congress (Washington: ProPAC, June 1996), 48.
5. Congressional Budget Office, Medicare's Disproportionate Share Adjustment for Hos-
pitals (Washington: CBO, May 1990).
6. Nancy M. Gordon, assistant director for human resources and community
development, Congressional Budget Office, testimony before the Senate Fi-
nance Subcommittee, 29 July 1985.
7. CBO, Medicare's Disproportionate Share Adjustment for Hospitals, xiv.
8. The inpatient days attributable to Medicaid managed care enrollees may be
counted for Medicare DSH payment purposes. For a more complete discus-
sion, see "Interpretation of Medicaid Days in Medicare DSH Adjustment Cal-
HEALTH AFFAIRS Volume 16, Number 4
EVOLUTION OF SUPPORT
culation," HCFA Ruling no. 97-2 (27 February 1997).
9. ProPAC, Report and Recommendations to the Congress (Washington: ProPAC, 1
March 1997), 30.
10. Congressional Budget Office, January 1997 baseline estimates.
11. ProPAC, Medicare and the American Health Care System, Report to the Congress (Wash-
ington: ProPAC, June 1991), 43.
12. ProPAC, Medicare and the American Health Care System (June 1996), 62.
13. Ibid., 63-64.
14. See ProPAC, Analysis of Medicaid Disproportionate Share Payment Adjustments, Con-
gressional Report C-94-01 (Washington: ProPAC, 1 January 1994); and L. Ku
and T. Coughlin, "Medicaid Disproportionate Share and Other Special Fi-
nancing Programs," Health Care Financing Review (Spring 1995): 27-54.
15. J. Holahan and D. Liska, Where Is Medicaid Spending Headed? (Washington: The
Urban Institute for The Kaiser Commission on the Future of Medicaid, De-
cember 1996).
16. Ibid., 2, Table 1.
17. Derived from the FY 1998 federal budget overview, which reports actual 1996
spending.
18. Association of American Medical Colleges, COTH Survey of Hospitals' Financial
and General Operating Data, 1995 (Washington: AAMC, Autumn 1996).
19. See L.E. Fishman, Medicare Payments with an Education Label: Fundamentals and the
Future (Washington: Association of American Medical Colleges, 1996). Medi-
care also recognizes the direct costs incurred by hospital-based nurse educa-
tion and allied health professions training programs.
20. Senate Report 404, Pt. 1, 89th Cong., 1st sess. 36 (1965); and House Report 213, 89th
Cong., 1st sess. 32 (1965).
SAFETY NET
47
21. Federal Register (30 August 1996): 46206-46207.
22. K. Davis et al., Health Care Cost Containment (Baltimore: The Johns Hopkins
University Press, 1990), 16-21.
23. Secretary of the Department of Health and Human Services, Hospital Prospective
Payment for Medicare: A Report to Congress (Washington: U.S. Government Print-
ing Office, December 1982), 48-49.
24. J.R. Lave, The Medicare Adjustment for the Indirect Costs of Medical Education: Historical
Development and Current Status (Washington: Association of American Medical
Colleges, January 1985).
25. ProPAC, Medicare and the American Health Care System (June 1996), 62-63.
26. Ibid., 62.
27. D. Plumb and T. Henderson, Medicaid Funding of Graduate Medical Education: A
Survey of the States (Washington: The Intergovernmental Health Policy Project
at The George Washington University, October 1995).
28. AAMC, COTH Survey of Hospitals' Financial and General Operating Data, 1995.
29. 1997 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund,
House Document 105-73 (April 1997).
30. ProPAC reported at its January 1997 meeting that in 1995-1996, major teach-
ing hospitals' aggregate PPS inpatient margin was 18.6 percent, compared
with 3.7 percent for nonteaching hospitals. Major teaching hospitals continue
to have the lowest total margins of any hospital group, however, at 3.7 percent,
compared with 6.5 percent for nonteaching hospitals in 1995-1996.
HEALTH AFFAIRS July/August 1997
HEALTH TRACKING : TRENDS
the first four steps are in-
e mail-only steps used for
a discussion of these tech-
an, Mail and Telephone Surveys:
A Changing Picture Of
(New York: John Wiley and
her described in a technical
Uncompensated Care
work on the Internet at
e.net/chpvs.
weighted cross-sectional
Hospitals, physicians, and community health centers all provide
nd 1995 samples. Inferences
charity care. To ignore any one of the groups could distort notions about
at the cross-sectional sam-
inal members. There is no
changes in access to care for the uninsured.
ble comparisons.
d 1995 means are calculated
BY PETER J. CUNNINGHAM AND HA T. Tu
without weighting.
eighted means for the longi-
993 and 1993-1995 changes
C
HANGES IN THE HEALTH CARE sys-
problematic, both because they usually serve
g longitudinal weights.
tem are causing renewed concern
other patients and because a substantial
The Employee Health Care
about access to care for uninsured per-
amount of charity and uncompensated care is
nd One," Health Affairs (Fall
sons. This paper reviews trends in the amount
dispensed by providers that serve the general
of resources that providers are devoting to
results is the position that
population. Also, while hospitals have tradi-
mines satisfaction, not vice
care of the medically indigent, as indicated by
tionally been considered the providers of last
n is supported by the strik-
uncompensated care costs. The results of this
resort for the medically indigent, ignoring
995 changes on the PCS and
study show that the amount of services pro-
trends in physician uncompensated care may
es of the self-rated outcomes
vided to the medically indigent has indeed
result in false conclusions about changes in
5 overall sample: For the PCS:
changed over the past ten to fifteen years, al-
-2.24, good -1.34, very good =
access. Thus, this study examines trends in
167
-0.62. For the MCS: poor
though the direction of the change is not con-
uncompensated care for all hospitals as well
good -1.11, very good -0.67,
sistent across types of providers. Hospital un-
as physicians and community health centers.¹
For further support, see the
compensated care costs, which rose rather
HOSPITALS. Hospitals subsidize care to
on the Internet.
substantially during the early 1980s, have
the medically indigent through both direct
are similar to Exhibit 4's, but
been relatively stagnant during the 1990s,
Its by level of health. Healthy is
funding from public sources-tax revenue,
es with three or fewer physical
while provision of uncompensated care by
uncompensated care pools, and Medicare and
in 1993 and values on the PCS
physicians and community health centers has
Medicaid disproportionate-share adjust-
SF-12 Health Status survey of
increased. In addition, hospital uncompen-
ments-and private philanthropy, as well as
is defined as patients with four
sated care costs have become more concen-
indirectly by shifting the costs of uncompen-
aronic conditions, or PCS ≤ 42,
trated among public hospitals and other hos-
ltiple comparisons are not ad-
sated care onto other payers.
4 or 5. For documentation on
pitals that provide a disproportionately high
Despite increases in the number of unin-
age used for these analyses, see
level of uncompensated care. These findings
sured persons, there have not been increases
Stata Statistical Software Refer-
may have important implications for access to
in the relative amount of uncompensated care
n 5.0, Reference P-Z (College
care among the uninsured.
provided by hospitals during the first part of
Corp., 1997), 135-137. For docu-
ole selection and scoring for the
the 1990s, either in terms of inflation-adjusted
alth measures, see H. Allen Jr.,
UNCOMPENSATED CARE TRENDS
costs or as a percentage of total costs (Exhibit
of Health and Health Care: The Cen-
1).² However, it appears that uncompensated
oston: New England Medical
There are identifiable groups of safety-net
care costs became somewhat more concen-
Allen Jr., "A Core Set of Survey
providers-such as public hospitals, some
trated among fewer hospitals. The percentage
lan Consumer Satisfaction: A
private nonprofit hospitals, and community
to the National Committee for
health centers-that serve a disproportion-
of hospitals that provided high levels of un-
in Annual Member Health Care
compensated care (10 percent or more of total
ion 1.0 (Washington: National
ately high number of the medically indigent.
costs) decreased between 1990 and 1994, al-
ality Assurance, 1995); and J.
However, focusing only on these providers is
ski, and S. Keller, How to Score
d Mental Health Summary Scales
Peter Cunningham is a health researcher at the Center for Studying Health System Change in Washington,
h Institute, 1995).
D.C. Ha Tu is an analyst at the center.
m b C 4
HEALTH AFFAIRS July/August 1997
1997 The People-to-People Health Foundation, Inc.
HEALTH TRACKING: TRENDS
though this smaller group incurred a larger
contract, compared with about 55 percent in
proportion of total hospital uncompensated
1990.4 To compound the problem, govern-
care costs (from 36.5 percent in 1990 to 38.2
ment subsidies now cover a smaller share of
percent in 1994). Public hospitals also in-
hospital uncompensated care costs, down
curred a larger burden of uncompensated care
from 27.8 percent in 1980 to 19.3 percent in
in 1994 than in 1990, as indicated by increases
1994 (Exhibit 1).
in both the percentage of total costs devoted
If private hospitals become increasingly
to uncompensated care (from 11.8 percent in
limited in their ability and willingness to pro-
1990 to 12.8 percent in 1994) and the propor-
vide uncompensated care, it will be difficult
tion of all hospital uncompensated care costs
for public hospitals to make up the difference.
incurred by public hospitals (from 33.4 per-
Medicaid expansions and sizable increases in
cent in 1990 to 36.8 percent in 1994).
Medicaid disproportionate-share funding
While these changes are fairly modest in
may have helped to fuel the small increase in
magnitude, they represent a reversal of the
uncompensated care provided by public hos-
trends of the previous decade. Between 1980
pitals during the 1990s, but continued reli-
and 1990, the relative costs of uncompensated
ance on this source of revenue is not likely
care for all community hospitals increased by
because of smaller increases in the number of
about 20 percent, with much of the increase
Medicaid beneficiaries and new limitations
occurring in the first half of the 1980s. More-
on disproportionate-share payments.
over, uncompensated care costs became less
In addition, if private hospitals simultane-
concentrated during the 1980s. Substantial in-
ously reduce their uncompensated care bur-
creases in the number and percentage of hos-
dens and attract more Medicaid managed care
pitals that provided a large amount of uncom-
patients, then public hospitals will be com-
168
pensated care were accompanied by equally
pelled to absorb even larger numbers of unin-
substantial decreases in the number of hospi-
sured patients while at the same time losing a
tals that provided relatively little uncompen-
vital source of revenue. This could seriously
sated care. Also in contrast to the 1990s, pri-
harm public hospitals' role as providers of last
vate hospitals incurred the largest increase in
resort. Not only do public hospitals provide
uncompensated care costs during the 1980s,
more than twice as much uncompensated
in terms of both the relative amount provided
care as private hospitals provide on average,
and the proportion of total uncompensated
but research has shown that the total amount
care costs.
of uncompensated care provided in a commu-
Why have the trends in the amount and
nity tends to be greater in communities with a
distribution of uncompensated care that oc-
public hospital than in those without.⁵
curred in the first half of the 1980s started to
PRIVATE PHYSICIANS. Although most
reverse in the 1990s, despite the fact that the
physicians receive no explicit subsidy to pro-
"demand" for uncompensated care has contin-
vide services to the uninsured, data from the
ued to increase? Perhaps the most plausible
American Medical Association's (AMA's)
explanation is that market pressures faced by
Socioeconomic Monitoring System (SMS)
hospitals have constrained their ability and
survey indicate that the amount of charity
willingness to provide uncompensated care in
and uncompensated care provided by physi-
recent years. The ability to shift costs has
cians is on the the rise.⁶ Nearly 68 percent of
been more limited in the 1990s compared with
physicians in 1994 provided some charity care
the 1980s, partly because of increasing compe-
(that is, care that was provided free of charge
tition and involvement with managed care
or at a reduced fee because of the financial
plans, which many consider to be more vigor-
need of the patient) (Exhibit 2).⁷ This repre-
ous in controlling costs.³ More than two-
sents an increase from 1990 (63.8 percent) and
thirds of private hospitals now have at least
1988 (62.0 percent). For physicians who pro-
one health maintenance organization (HMO)
vided charity care, the average amount of time
HEALTH AFFAIRS Volume 16, Number 4
HEALTH TRACKING: TRENDS
EXHIBIT 1
Trends In Hospital Provision Of Uncompensated Care, 1980-1994
Year
Trends
1980
1985
1990
1994
Total costs of uncompensated care (billions of
dollars)ᵃ
All hospitals
$13.8
$15.7
$16.7
$16.8
Public hospitals
6.0
5.5
5.6
6.2
Private hospitals
7.8
10.2
10.9
10.6
Uncompensated care costs as percent of total
costs
All hospitals
5.1%
5.7%
5.9%
6.1%
Public hospitals
11.2
11.4
11.8
12.8
Private hospitals
3.6
4.5
4.7
4.7
Percent distribution of hospitals, by level of
uncompensated care costs incurredᵇ
0-2% of total costs
31.1
19.1
20.6
21.6
3-5%
48.8
48.4
45.3
45.2
6-9%
14.8
23.4
24.4
24.7
10% or more
5.3
9.0
9.6
8.5
Percent distribution of hospitals with "high"
uncompensated care costs, by ownershipᶜ
Public
68.4
59.7
54.9
56.1
Private
31.6
40.3
45.1
43.9
169
Percent distribution of total uncompensated care
costs, by level of uncompensated care costs
incurredᵇ
0-2% of total costs
9.3
5.4
5.0
5.4
3-5%
34.1
35.4
31.9
31.3
6-9%
19.3
22.9
26.5
25.1
10% or more
37.2
36.4
36.5
38.2
Percent of total uncompensated care costs
incurred by public hospitals
43.1
35.1
33.4
36.8
Percent of uncompensated care costs covered
by government subsidies
All hospitals
27.8
19.8
21.0
19.3
SOURCE: American Hospital Association annual surveys.
NOTES: Estimates are for all U.S. registered community hospitals.
a Results for 1980-1990 were adjusted for inflation to reflect 1994 dollars, based on the Consumer Price Index for hospital
services.
b Uncompensated care costs were measured as a percentage of total costs for each hospital.
C A hospital is classified as incurring high uncompensated costs if these costs equal or exceed 10 percent of its total costs.
they spent providing that care also increased
increases in the number of uninsured may
between 1990 and 1994. Total uncompensated
have contributed to the greater amount of
care costs (including bad debt) in 1994 were
charity care provided, increases in bad-debt
estimated at $21 billion, an increase of about
costs may have resulted from greater numbers
65 percent from 1990 after inflation.
of underinsured patients.⁸ More vigorous ef-
The increase in physician uncompensated
forts to control uncompensated care costs on
care was a combination of increases in both
the part of hospitals as well as the general shift
charity care provision and bad debt. While
of health care resources from hospital-based
HEALTH AFFAIRS July/August 1997
HEALTH TRACKING: TRENDS
EXHIBIT 2
Uncompensated Care Provided By Physicians, 1988-1994
Year
1988
1990
1994
Percent of physicians providing charity care
62.0%
63.8%
67.7%
Time spent providing free and reduced-fee careᵃ
Hours per week that physicians provide charity
care
6.6
6.5
7.2
Charity care hours as percent of total hours
worked
11.0%
10.6%
12.4%
Uncompensated care costs (billions of dollars)b
_C
$12.76
$21.14
SOURCE: D.W. Emmons, "Uncompensated Physician Care," in Socioeconomic Characteristics of Medical Practice, 1995
(Chicago: American Medical Association, Center for Health Policy Research, 1995).
a Based on physicians who provided charity care.
b Results for 1990 were adjusted by the authors for inflation to reflect 1994 dollars based on the Consumer Price Index for
physician services.
C Not available.
inpatient care to office-based outpatient care
nue expanded during the 1990s, in large part
may also be fueling the increased demand for
because of a substantial increase in revenue
physician uncompensated care.
from Medicaid. Medicaid accounted for one-
Nevertheless, the substantial increase in
third of all community health center revenue
physician uncompensated care is somewhat
in 1995, up from 20.3 percent in 1990. The
170
unexpected, since physicians are subject to
influx of Medicaid revenue is the result of
the same financial pressures that are making
both expanded eligibility and legislation that
it difficult for hospitals to provide charity
mandated cost reimbursement for Medicaid
care. It is possible that the potential effects of
patients at federally qualified health centers.
some of these pressures either have been ex-
Expansion of community health center ca-
aggerated or have yet to have a meaningful
pacity has permitted an increase in the
impact on physicians. For example, the pro-
number of uninsured patients treated at com-
portion of physician practice revenue derived
munity health centers-from about 2.2 mil-
from managed care contracts increased only
lion in 1990 to almost three million in 1995.
from 28 percent in 1990 to 34 percent in 1994,
The estimated cost of providing services to
which suggests that the level of managed care
the uninsured was more than $1 billion in
involvement among physicians was not yet
1995, a 55 percent increase from 1990 even
high enough during that time to have a signifi-
after taking inflation into account. 10 However,
cant impact on charity care provision.⁹
it is important to note that even though unin-
COMMUNITY HEALTH CENTERS.
sured patients comprise 40 to 45 percent of
Community health centers receive grants
community health centers' patients and total
from the federal government and other
costs, community health centers actually
sources to provide comprehensive primary
serve only a small percentage of the total unin-
health care services to persons living in medi-
sured population (6.5 percent). The aggregate
cally underserved areas. According to data
costs for community health centers of provid-
from the Bureau of Primary Health Care, the
ing services to the uninsured are much smaller
number of community health center sites, pa-
than the aggregate costs of services provided
tients served at those sites, and primary care
to the uninsured by physicians and hospitals.
physicians practicing at those sites increased
The relatively small number of uninsured per-
substantially during the 1990s (Exhibit 3).
sons served by community health centers is
Community health center capacity and reve-
probably attributable to the fact that such
HEALTH AFFAIRS Volume 16, Number 4
HEALTH TRACKING : TRENDS
centers are not located in all U.S. communi-
rates could result in greater competition from
ties. In addition, many uninsured persons,
private health plans and other providers for
most of whom have incomes above the pov-
this vital source of revenue. In contrast to
erty line, do not live in the medically under-
public hospitals, however, community health
served areas targeted by community health
centers may be in a better position to survive
centers.
by entering into various types of arrange-
Although increased Medicaid revenue has
ments with health plans and providers, which
probably benefited community health cen-
are attracted to community health centers be-
ters' Medicaid and uninsured patients, in-
cause of their primary care emphasis and ex-
creasing reliance on Medicaid as a major
pertise and large Medicaid patient base."
source of revenue carries some risks, espe-
DISTRIBUTION OF UNCOMPENSATED
cially given the shift to managed care. Low
CARE COSTS. The trends in Exhibits 1, 2, and
capitation rates for Medicaid managed care
3 imply that there has been a shift of uncom-
patients may result in greater financial strains
pensated care resources from hospital to non-
for community health centers, whereas high
hospital sources, although direct comparisons
EXHIBIT 3
Trends In Community Health Centers, 1990-1995
Year
Trends
1990
1993
1995
Number of community health center sites
1,396
1,574
1,647
Number of patients served (thousands)
5,887
6,866
7,787
171
Primary care physicians
Total number of primary care physicians
serving at community health centers
2,450
3,000
3,450
Average number of primary care physicians
per 10,000 medical care users
4.80
5.03
5.14
Community health center revenues
Total revenues (millions of dollars)
$1,631
$2,158
$2,396
Percent of revenue by source
Federal grants
40.3%
31.7%
28.4%
State, local, and other sources
15.9
16.7
16.7
Medicaid
20.3
31.9
33.4
Medicare
6.0
5.2
6,5
Other third party
8.8
7.7
8.3
Patient fees
8.8
6.7
6.7
Uninsured patients at community health centers
Number of uninsured patients (thousands)
2,240
2,770
2,985
Percent of all community health center patients
38.0%
39.0%
39.0%
Percent of uninsured persons who use community
health centers
5.4
5.6
6.5
Cost of care for uninsured persons
For all services (millions of dollars)ᵃ
$680
$943
$1,054
Percent of total costs
41.8%
44,5%
44.0%
SOURCE: U.S. Department of Health and Human Services, Public Health Service, Bureau of Primary Health Care, unpublished
data.
NOTE: Includes community and migrant health centers covered under Sections 329 and 330 of the Public Health Service Act.
a Estimated as the sum of costs of medical services to uninsured persons, plus the costs of enabling services, minus patient
fees. Results for 1990 and 1993 were adjusted for inflation to reflect 1995 dollars based on the Consumer Price Index for
physician services.
HEALTH AFFAIRS July/August 1997
HEALTH TRACKING : TRENDS
in the relative magnitude of hospital, physi-
care measures do not reflect the relatively high
cian, and community health center uncom-
percentage of uninsured persons who report
pensated care costs are problematic because
unmet health needs, nor do they indicate ap-
of different data collection and computational
propriateness of care setting and whether care
methods. Charity care and bad-debt expenses
was received in a timely and cost-effective
in the American Hospital Association (AHA)
manner.¹³ Direct measures of access to care are
annual survey are obtained directly from hos-
required to draw more firm conclusions about
pital financial records.¹² Physician uncompen-
trends in access to care for the uninsured.
sated care is calculated by the AMA by multi-
While physician uncompensated care in-
plying hours of charity care by the value of
creased substantially between 1990 and 1994,
physicians' time (that is, mean gross earnings)
physician use by the uninsured remained es-
and adding bad-debt expenses. All three com-
sentially unchanged during this period (about
ponents of the physician uncompensated care
three visits a year on average per person), and
measure are based on respondents' estimates,
the gap in physician use between uninsured
which are subject to recall error. Estimates of
and privately insured persons widened
the amount of care that community health
slightly (Exhibit 4). Furthermore, the per-
centers provide to uninsured patients in-
centage of uninsured persons who lacked a
volved multiplying the number of uninsured
usual source of care, a traditional measure of
patients by the average cost per patient plus
access that facilitates entry into the system,
the costs of enabling services.
increased from 27.7 percent in 1977 to 35.9 per-
These methodological differences make it
cent in 1993 (with 7 percent of the increase
difficult to conclude that physicians actually
taking place between 1977 and 1987), which
provided more uncompensated care than hos-
indicates that nonemergency access to pri-
172
pitals provided in 1994 ($21 billion for physi-
mary care among uninsured persons is dete-
cians versus $16.8 billion for hospitals). How-
riorating. The percentage of privately insured
ever, community health centers clearly have a
persons without a usual source of care de-
much smaller share of the uncompensated
creased between 1987 and 1993, thereby
care market than either physicians or hospi-
greatly increasing the disparity between un-
tals have. Nevertheless, because these meth-
insured and privately insured persons, which
ods are at least consistent over time, it is plau-
may reflect increases in the percentage of pri-
sible that the almost zero growth in hospital
vately insured persons who were in HMOs
uncompensated care costs during the first
and other managed care plans that require en-
part of the 1990s and the large increases in
rollees to have a primary care provider.¹²
physician uncompensated care costs and
Inferences about access based on hospital
community health center costs strongly sug-
uncompensated care measures are even more
gest that there has been a shift in uncompen-
problematic. First, hospital utilization for all
sated care costs from hospitals to nonhospital
groups has declined substantially over the
sources.
past fifteen years as a result of cost control
IMPLICATIONS FOR ACCESS. While
measures by payers as well as innovations in
the amount of uncompensated care provided
care delivery that allow more procedures to be
has important implications for access to care
done in ambulatory settings. Thus, changes in
for the uninsured, it is a relatively poor meas-
the consumption of hospital services, as indi-
ure with which to assess changes in access.
cated by hospital uncompensated care, rates
First, it is unclear whether trends in uncom-
of discharges, or lengths-of-stay, tell us very
pensated care reflect changes in demand (for
little about changes in access to hospital care.
example, the number of uninsured persons)
Second, hospitalizations are increasingly
or changes in supply (for example, as a result
viewed as reflective of poor outcomes of care
of competition and providers' financial cir-
for certain conditions that are considered
cumstances). In addition, uncompensated
treatable in ambulatory care settings. Pre-
HEALTH AFFAIRS - Volume 16, Number 4
HEALTH TRACKING: TRENDS
EXHIBIT 4
Estimates Of Access To Care And Service Use By The Uninsured And Privately Insured,
By Measure And Year
Estimate for
Estimate for privately
Measure and year
uninsured persons
Insured persons
Average number of annual physician visits
per personᵃ
1986
3.1
4.2
1990
3.2
4.4
1994
3.0
4.6
Percent of persons without a usual source
of careᵇ
1977
27.7%
15.3%
1987
34.6
18.5
1993
35.9
11.3
Hospital discharges per 1,000 personsᵃ
1986
63.3
75.5
1990
58.3
64.1
1994
47.7
56.6
Percent of hospital discharges for ACS
conditionsᶜ
1985
6.8%
5.3%
1990
10.1
6.6
173
1994
12.7
7.6
SOURCES: National Health Interview Survey; National Medical Expenditure Survey; and National Hospital Discharge Survey.
NOTES: All estimates are for persons under age sixty-five. All estimates are age-adjusted. using as the base the age distribution
of the privately insured population in the most recent year (1993 for the usual source of care measure; 1994 for all other
measures). ACS is ambulatory care-sensitive.
a Based on the National Health Interview Survey.
b Based on the National Medical Expenditure Survey (1977, 1987) and the National Health Interview Survey (1993).
C Based on the National Hospital Discharge Survey. ACS conditions were defined similarly to those used in J.S. Weissman, C.
Gatsonis, and A.M. Epstein, "Rates of Avoidable Hospitalization by Insurance Status in Massachusetts and Maryland," Journal of
the American Medical Association (4 November 1992): 2388-2394. Conditions include ruptured appendix, asthma, cellulitis,
congestive heart failure, diabetes, gangrene, immunizable conditions, malignant hypertension, pneumonia, pyelonephritis, and
chronic obstructive pulmonary disease. Uninsured is defined as discharges that were classified as self-pay or no charge.
vious research has found that rates of hospi-
providing timely treatment in the least costly
talizations for ambulatory care-sensitive
settings, it will be difficult to determine
(ACS) conditions are higher among the unin-
whether increases in hospital uncompensated
sured than the privately insured, which re-
care costs reflect increased access to hospital
searchers interpret as indicating less access to
services or decreased access to office-based
primary care for uninsured persons.¹⁵ Further-
primary care for uninsured persons.
more, this disparity has grown worse over the
past ten years. The percentage of hospital dis-
CONCLUSION
charges for ACS conditions among uninsured
Policymakers are concerned about potential
persons almost doubled between 1985 and
reductions in the provision of uncompensated
1994, and discharges for these conditions
care because these reductions could result in a
were 1.67 times higher for uninsured persons
serious deterioriation in access to care for the
than for privately insured persons in 1994,
uninsured. While much of this concern is fo-
compared with 1.29 times higher in 1985 (Ex-
cused on the traditional safety-net provid-
hibit 4).¹⁶ With the increasing emphasis on
ers-public hospitals and community health
HEALTH AFFAIRS July/August 1997
HEALTH TRACKING: TRENDS
centers-there is perhaps an even greater
these more complex phenomena.
threat from the pressures on mainstream
providers-private hospitals and physi-
The Center for Studying Health System Change is sup-
cians-to limit their uncompensated care
ported in full by The Robert Wood Johnson Founda-
services. While mainstream providers cur-
tion. The authors gratefully acknowledge the support
rently provide most of the uncompensated
and assistance of the individuals and organizations
care, they receive few government subsidies
that provided data for this study: Joe Martin and
to finance this care, and, unlike public hospi-
Lloyd Wackerling, American Hospital Association;
tals and community health centers, many do
Bonnie Lefkowitz Bureau of Primary Health Care;
not have an explicit mission to serve the unin-
Joel Cohen, Agency for Health Care Policy and Re-
sured. Given the substantial challenges that
search; Ann Hardy, Peggy Barker, and Susan Jack, Na-
traditional safety-net providers face just to
tional Center for Health Statistics (NCHS) (National
survive in the near future, they will have diffi-
Health Interview Survey); and Robert Pokras, Maria
culty absorbing an even greater burden of un-
Owings, and Elaine Wood, NCHS (National Hospital
compensated care.
Discharge Survey). The authors also acknowledge
Data required to understand these changes
Linda Kohn of the Center for Studying Health System
and their effect on access to care for the unin-
Change (CSHSC) for valuable contributions to the
sured are limited. Previous research has fo-
conceptualization of this study; Mary Harrington of
cused on hospital uncompensated care, in
Mathematica Policy Research, Inc., Jack Ashby of the
part because these data are more extensive
Prospective Payment Assessment Commission, and
than are data on uncompensated care by other
David Emmons of the American Medical Association
providers. However, this focus ignores the siz-
for helpful comments on some specific findings; Paul
able amount of charity care provided by physi-
Ginsburg, Joy Grossman, Mark Legnini, and Jim
174
cians and other nonhospital providers. In addi-
Reschovsky from CSHSC and Jane Stein from The
tion, changing delivery patterns are probably
Stein Group for their review of earlier drafts and
resulting in a shift of uncompensated care re-
many helpful comments; Jeremy Pickreign from
sources from inpatient to outpatient services.
CSHSC and Ase Sewall and Beny Wu from Social and
The shift from high-cost hospital-based serv-
Scientific Systems for programming support; and Ruth
ices to lower-cost outpatient facilities in-
Griffin from CSHSC for assistance with the prepara-
creases the importance of examining changes
tion of tables.
in the distribution of uncompensated care
NOTES
costs across different providers. This will be
difficult, if not impossible, for most communi-
1. Local public health departments and clinics that
do not receive federal grant funds (but are consid-
ties, however, because of the lack of data on
ered federally qualified health centers for Medic-
uncompensated care from private physicians
aid reimbursement) also provide a disproportion-
and other providers and problems of compa-
ately large amount of indigent care. However,
rability of data sources when they exist.
they are excluded from this analysis primarily be-
cause of lack of national data. Although conclu-
Finally, more direct measurement of access
sions about trends in the capacity of the safety net
through population surveys and other meth-
must consider these omissions, it is likely that
ods is necessary to fully understand the im-
they treat only a small portion of the care pro-
pact that system changes are having on care
vided to uninsured patients. Federally assisted
for the uninsured. Access is not just a ques-
health centers account for more than 80 percent
of all patients of federally qualified health centers
tion of adequate resources but also includes
(estimated by comparing data on all federally
the process of getting care (for example, the
qualified health centers, compiled by the National
proximity of providers, the convenience of of-
Association of Community Health Centers, with
fice hours, and getting the necessary care and
data on federally assisted community health cen-
treatment once inside the system) and the ap-
ters from the Bureau of Primary Health Care).
Also, approximately 70 percent of local health de-
propriate level and type of care. Measures of
partments do not provide primary care services.
uncompensated care tell us very little about
National Association of County and City Health
HEALTH AFFAIRS Volume 16, Number 4
HEALTH TRACKING: TRENDS
Officials and Centers for Disease Control and
puted by AHA researchers.
Prevention, 1992-1993 National Profile of Local Health
13. M.L. Berk, C.L. Schur, and J.C. Cantor, "Ability
Departments (Washington: NACCHO, 1995).
to Obtain Health Care: Recent Estimates from
2. Hospital uncompensated care costs are defined
the Robert Wood Johnson Foundation National
as the sum of charity care and bad debt. Uncom-
Access to Care Survey," Health Affairs (Fall 1995):
pensated care net of government subsidies is a
139-146; and K. Donelan et al., "Whatever Hap-
more appropriate measure when assessing the
pened to the Health Insurance Crisis in the
financial burden of uncompensated care on hos-
United States?" Journal of the American Medical Asso-
pitals.
ciation 276, no. 16 (1996): 1346-1350.
3. J. Mann et al., "Uncompensated Care: Hospitals'
14. In this analysis, persons who identified a hospi-
Responses to Fiscal Pressures," Health Affairs
tal emergency room as their usual source of care
(Spring 1995): 263-270.
were classified as not having a usual source of
4. Prospective Payment Assessment Commission,
care. The differences in usual source of care men-
Medicare and the American Health Care System: Report
tioned in the text were statistically significant at
to the Congress (Washington: ProPAC, 1996), 34.
the .05 level. Some caution should be used with
5. K. Thorpe and C. Brecher, "Improved Access to
these findings, since the estimates for different
Care for the Uninsured Poor in Large Cities: Do
years are based on different surveys. The Na-
Public Hospitals Make a Difference?" Journal of
tional Health Interview Survey (NHIS) was used
Health Politics, Policy and Law (Summer 1987):
for the 1993 estimates, while the National Medi-
313-324.
cal Expenditure Survey (NMES) was used for
6. It is important to note that the method for deter-
1977 and 1987. Usual source of care was not avail-
mining charity and uncompensated care costs
able in earlier versions of the NHIS, and the most
for physicians is considerably different than it is
recent NMES is not yet available. Although there
for hospitals. The former relies largely on physi-
are some differences, the surveys use similar word-
cians' recall of the number of hours they spent in
ing for the usual-source-of-care question, mode of
the previous week providing care for free or at a
interview (in-person), use of proxy responses,
reduced charge and is subject to reporting error.
length of interview (and placement of the question
The extent of this error is unknown. By contrast,
in a special supplement toward the end of the in-
175
hospital uncompensated care costs are derived
terview), and design of population weights. There
directly from hospital financial records.
were some differences in the way that insurance
7. The estimates of physician charity and uncom-
status was ascertained, although attempts were
pensated care in Exhibit 2 were computed by
made to minimize these differences.
researchers at the American Medical Associa-
15. J.S. Weissman, C. Gatsonis, and A.M. Epstein,
tion. See D.W. Emmons, "Uncompensated Physi-
"Rates of Avoidable Hospitalization by Insur-
cian Care," in Socioeconomic Characteristics of Medi-
ance Status in Massachusetts and Maryland,"
cal Practice, 1995 (Chicago: AMA, Center for
Journal of the American Medical Association (4 No-
Health Policy Research, 1995).
vember 1992): 2388-2394.
8. P.F. Short and J.S. Banthin, "New Estimates of
16. The differences mentioned in the text are statis-
the Underinsured Younger than 65 Years," Jour-
tically significant at the .05 level. It is important
nal of the American Medical Association 274, no. 16
to note that the percentage of hospital dis-
(1995): 1302-1306.
charges for ACS conditions increased for all per-
9. D.W. Emmons and C.J. Simon, "Managed Care:
sons during this period, regardless of insurance
Participation, Revenues, and Risk," in Socioeco-
status. Thus, caution should be used in inter-
nomic Characteristics of Medical Practice, 1995.
preting these findings, since it is likely that fac-
10. Since community health centers receive federal
tors unrelated to access are affecting changes in
grants, few services are truly uncompensated.
hospital use patterns. Nevertheless, the fact that
The estimates cited serve as a proxy for uncom-
the rate of increase for uninsured persons was
pensated care costs and refer to services that are
more than double that of privately insured per-
not generally reimbursable through third parties
sons suggests that the use of inpatient services
but are subsidized through federal grants and
for ACS conditions relative to more general
other funding sources.
changes in hospital utilization patterns is in-
11. D.J. Lipson and N. Naierman, "Effects of Health
creasing.
System Change on Safety-Net Providers," Health
Affairs (Summer 1996): 33-48.
12. Financial data are missing for some hospitals in
the AHA survey. For example, uncompensated
care data were missing for about 18 percent of
hospitals in the 1994 AHA survey and were im-
HEALTH AFFAIRS July/August 1997
HEALTH TRACKING : FROM THE FIELD
Lessons From Arizona's
Medicaid Managed Care
Program
With thirteen years of experience, Arizona's Medicaid managed care
program offers valuable insight into the potential and pitfalls of this
form of safety-net system.
BY NELDA MCCALL
TH INCREASED PRESSURE on
ices and nursing home services to Medicaid
W
public programs to decrease costs
eligibles who are at risk of institutionalization.
while maintaining a safety net of
The AHCCCS program provides managed
service use for beneficiaries, many state
care services through acute care plans and
Medicaid programs are looking to managed
long-term care contractors capitated by the
care as an important component of an im-
state. Covered services for Medicare benefici-
proved and more cost-effective delivery sys-
aries are paid for on a fee-for-service basis by
194
tem. This paper examines the lessons learned
Medicare. Providers are required to bill Medi-
from evaluations of the first statewide man-
care first for such services.² The state provides
aged Medicaid program, the Arizona Health
the overall direction for the program with re-
Care Cost Containment System (AHCCCS).
sponsibilities for eligibility and enrollment;
The paper focuses on two questions: (1) Does
selecting, paying, and regulating capitated
the experience in Arizona justify expansion of
providers; monitoring the quality and appro-
Medicaid managed care to other states? (2)
priateness of care; and maintaining an infor-
What lessons learned in Arizona should other
mation system to support program opera-
states consider as they move into Medicaid
tions. In addition, Arizona provides
managed care?
reinsurance for inpatient services and cover-
THE AHCCCS PROGRAM
age for catastrophic services. In the past,
AHCCCS has also acted as the plan or con-
The AHCCCS program began in October 1982
tractor in counties for which it was unable to
as an alternative to traditional Medicaid. Be-
find a qualified organization at an acceptable
fore AHCCCS, Arizona was the only state not
capitation rate.
participating in Medicaid. The original
Plans and contractors engage in a broad
AHCCCS program did not cover nursing home
range of service delivery, internal monitoring,
care. In 1989 the Arizona Long-Term Care Sys-
and data-sharing activities. Besides providing
tem (ALTCS) was incorporated into
case-managed covered services, they must
AHCCCS. ALTCS provides a full range of
manage a provider network, distribute a
acute home-based and community-based serv-
member handbook, and collect third-party
Nelda McCall is president of Laguna Research Associates, in San Francisco. She has directed numerous
major government and private foundation evaluations, including two six-year Health Care Financing Ad-
ministration evaluations of the Arizona Health Care Cost Containment System. She is also the project
director of The Robert Wood Johnson Foundation's evaluation of its Partnership for Long-Term Care.
HEALTH AFFAIRS Volume 16, Number 4
© 1997 The People-to-People Health Foundation, Inc.
HEALTH TRACKING: FROM THE FIELD
and patient liabilities. They must also main-
Arizona program: cost of the program, use of
tain systems for quality management, finan-
health care services by program beneficiaries,
cial management, grievance and appeals, and
and access to and quality of services received
data management. The data management sys-
under AHCCCS.⁵
tem must support timely submission of data
COST. The cost analyses for the acute
to AHCCCS.
care AHCCCS program compared the actual
AHCCCS covered about 463,000 benefici-
per capita costs by eligibility group with an
aries in the acute part of the program and
estimate of the per capita costs of a traditional
23,000 beneficiaries in ALTCS in March 1997.
Medicaid program in Arizona.⁶ Comparison
Most acute care beneficiaries were served
states were those with reliable and complete
through one of the fourteen health plans se-
data that were similar to Arizona in their
lected through a competitive bidding process.
Medicaid requirements. For fiscal year (FY)
The state releases a request for proposals that
1983 through FY 1993, savings of $197 million
lists participation requirements and evalu-
were estimated, an average savings per year of
ation criteria. Acute care beneficiaries choose
approximately II percent of medical service
from among the health plans available in their
costs and 7 percent of total costs (medical
county. All of the counties have more than one
service costs plus administrative costs). The
health plan.
average annual increase in cost for the
The long-term care program serves those
AHCCCS acute care program (9.1 percent)
who are financially eligible (up to 300 percent
was also smaller than the annual increase for
of Supplemental Security Income eligibility)
the traditional program (10.3 percent).
and determined by state assessors, using a
The ALTCS cost analyses compared the
preadmission screening instrument, to be at
number of users, cost per month, and total
risk of institutionalization. Beneficiaries in-
cost for ALTCS with estimates of what a tra-
195
clude the elderly and physically disabled and
ditional Medicaid program in Arizona would
the mentally retarded/developmentally dis-
have cost for the first five years of the pro-
abled. Five counties and two private entities
gram, 1989 through 1993. Estimates for the
serve as contractors for the elderly and physi-
traditional program were made for compari-
cally disabled. There is only one contractor
son states using the Medicaid Statistical In-
per county. The Arizona Department of Eco-
formation System. ALTCS costs, including
nomic Security is the contractor for the men-
medical and administrative costs, were on av-
tally retarded/developmentally disabled.³
erage 16 percent per year lower than the costs
Contractors provide case management and
of a traditional Medicaid program in Arizona.
make placement decisions.⁴ They are capi-
When considering medical services alone, the
tated at a negotiated rate using a methodology
ALTCS savings were 18 percent per year. To-
that provides economic incentives to care for
tal cost savings were almost $290 million, and
beneficiaries at home rather than in nursing
these savings increased substantially over
homes.
time (0.2 percent in 1989, 8 percent in 1990, 15
percent in 1991, and 21 percent in 1992 and
DOES ARIZONA'S EXPERIENCE
1993). The average annual cost increases for
JUSTIFY EXPANSION OF MEDICAID
ALTCS were lower than the increases for a
MANAGED CARE?
traditional program, 4.0 percent per year ver-
sus an estimated 9.6 percent per year.
The successes and failures of the longest-
USE OF SERVICES. Examination of the
running statewide Medicaid managed care
long-term care and acute care programs found
program serving all eligibility groups should
that beneficiaries in these programs used less
be considered by other states in their deci-
institutional care than Medicaid beneficiaries
sions about whether and how to implement
in New Mexico used and more or about the
Medicaid managed care. This section summa-
same amount of ambulatory care.
rizes the evaluation of several aspects of the
HEALTH AFFAIRS July/Augusi 1997
HEALTH TRACKING: FROM THE FIELD
The analysis for the acute care program
revealed that Arizona's elderly and disabled
was based on Medicaid claims and encounters
beneficiaries were more likely than New
for a 5 percent randomly selected sample of
Mexico's elderly and disabled to have pres-
AHCCCS and New Mexico Medicaid benefi-
sure sores, fever, or a catheter inserted and
ciaries for FYs 1991 and 1992. For the long-
less likely to be offered an influenza vaccine.
term care program, ALTCS claims data and
The incidence of falls and fractures and the
encounters data for all eligible beneficiaries
use of psychotropic drugs were similar in the
receiving chronic long-term care services in
two states. In response to these findings,
New Mexico were linked with Medicare
ALTCS initiated steps to include monitoring
claims to give a full picture of all medical care
of the problem areas in their ongoing quality
service use for January 1991 through Septem-
assurance activities.
ber 1992. Services in both states were catego-
Analyses of new admissions of elderly and
rized using the same methods.⁷
physically disabled beneficiaries into the
Beneficiaries of Aid to Families with De-
long-term care program found a much more
pendent Children (AFDC) in the acute care
coordinated system of care in Arizona, which
programs in Arizona and New Mexico had
permitted transitions from nursing home to
about five evaluation and management visits
home care and vice versa. Evaluation of the
(that is, office, home, nursing home, specialty,
cost-effectiveness of home care provided un-
consultations, and therapies) per person-year,
der ALTCS indicated that attempts to limit
but the number of hospital days per thousand
spending on long-term care by diverting cli-
person-years was 40 percent lower in Arizona
ents to home care settings have been success-
(590 days versus 976 days). Evaluation and
ful. This is in stark contrast to previous evalu-
management visits for ALTCS elderly and
ations of home and community-based care
196
physically disabled eligibles resulted in more
programs that have found home care to be a
visits (thirteen versus nine), but the number
complement to institutional care, not a sub-
of hospital days per thousand person-years
stitute.⁸
was 22 percent lower than in the traditional
The analyses of the two programs' out-
program in New Mexico (3,692 versus 4,731).
comes indicated that the program was provid-
QUALITY AND ACCESS. Several quality
ing better access to good-quality care at a
and access studies of the AHCCCS and
lower cost. However, some of the analyses
ALTCS programs, which used New Mexico
showed the program to be doing worse than a
Medicaid beneficiaries as the control group,
traditional Medicaid program, suggesting the
revealed mixed results. An access and satis-
need for close monitoring of quality-of-care
faction survey conducted in 1985 indicated
and access issues. Studies performed over the
better access to routine and urgent care in
course of the two evaluations highlighted ar-
AHCCCS than in the New Mexico program
eas in which AHCCCS procedures and meth-
and high satisfaction scores for services. Pri-
ods could be improved and demonstrated the
mary prevention, preventive care use, and use
importance of having an ongoing analysis ca-
of medical care for particular symptoms were
pacity within the administration of a man-
similar in the two states. A review of Medic-
aged care program.
aid records of AFDC children and pregnant
women in 1985-1987 indicated earlier, more
LESSONS FROM ARIZONA?
frequent, and more complete health care for
children in Arizona. Maternity care and preg-
Besides looking at program outcomes, the
nancy outcomes were similar in the two
analyses also examined the implementation
states, but Arizona had later initiation of
and operation of the major features of the
pregnancy care and fewer prenatal visits.
AHCCCS program. States implementing
With respect to the ALTCS program, a re-
managed care may want to consider the fol-
view of nursing home records in 1991 and 1992
lowing five recommendations in designing
and implementing their programs.
HEALTH AFFAIRS
Volume 16. Number 4
HEALTH TRACKING: FROM THE FIELD
SELECT LEADERS WHO HAVE THE
program is the relationship between the state
REQUIRED SKILLS. When designing and im-
and the health plans and contractors. Respon-
plementing new managed care programs,
sibilities of the contracting entities in
leadership is needed in three key positions
AHCCCS include a specifically defined broad
that do not always exist in traditional Medic-
range of service delivery, internal monitoring,
aid programs: a chief information officer who
third-party liability identification and collec-
knows how to collect and analyze data and
tion, and data-sharing activities. The state
use it for policy development; a chief financial
also has defined responsibilities that are con-
officer who has experience in the financial
sistent with its primary responsibility for
management of managed care organizations
overall program direction. Clear definition of
and who can lead the monitoring of plan op-
authorities and responsibilities is critical to
erations; and a chief medical officer who has
program success.
experience leading activities in assuring and
Rules for participation and selection. Participa-
monitoring the quality of care in the delivery
tion and selection criteria also need to be
of Medicaid services. AHCCCS did not have
clearly defined. Participation in AHCCCS is
persons with these kinds of skills in place at
restricted to organizations that meet specific
the beginning of the program, and many of its
network requirements; have internal controls
implementation problems can be traced to
for quality, financial, and grievance monitor-
this lack of leadership. In the three areas out-
ing; and have systems in place to produce the
lined, the leaders must be in senior positions
data that are required under the program. Se-
in the organization and have sufficient stature
lection of winning bidders follows a defined
to conduct discussions and negotiations with
structure that emphasizes the provider net-
other state organizations and with health
work in selection but also considers the capi-
plan chief executive officers. In addition,
tation rate bid, the ability of the contractor to
197
these leaders must have the vision to formu-
meet the program's requirements, and the
late a specific plan of operation and select and
qualifications of the organization. Having
manage appropriate staff.
bidders who do not win contracts is impor-
CONSIDER DESIGN OPTIONS FOR THE
tant to keeping the marketplace competitive.
PROGRAM'S OPERATIONS. The design of
Method of setting capitation payment. The way
the following operational areas is particularly
capitation rates have been set has evolved
important to the AHCCCS program and
over time in the AHCCCS and ALTCS pro-
should be carefully considered in any new
grams. Specific marketplace considerations
program.
should be taken into account in developing an
Eligibility determination and enrollment.
appropriate strategy for each solicitation. In
AHCCCS acute care implementation analyses
the beginning of a new program, the active
suggest that carefully thinking through the
involvement of the state may be necessary to
process of enrollment and how it interacts
help safety-net providers and other potential
with the process of eligibility determination
bidders get organized to participate. In addi-
can help to avoid unnecessary fee-for-service
tion, the state may need to assume some of the
liabilities. If beneficiaries select from multiple
risk of the cost of delivering services by retro-
plans, the plans' marketing materials, media
actively adjusting certain components of the
advertising, and solicitation methods should
capitation payment.
be reviewed and approved. In Arizona's
Meeting the information needs of the program.
ALTCS program, the state performs the func-
Perhaps most important in managed care is
tional/medical assessment for eligibility using
having a management information system
a preadmission screening instrument and
that emphasizes not only the operation of
therefore controls entry into the system.
hardware and software but also the quality of
Responsibilities of the capitated entities and the
the input data. Both the state and the partici-
state. Central to the workings of the AHCCCS
pating plans in AHCCCS have demonstrated
HEALTH AFFAIRS July/August 1997
HEALTH TRACKING: FROM THE FIELD
that credible data on eligibility, enrollment,
Utilization and access monitoring. Analysis of
networks, cost, use of services, and, for long-
the use of medical services is a critical compo-
term care beneficiaries, medical and func-
nent in understanding how a medical care
tional assessments can be captured and play
program is performing. In a capitated pro-
an important role in managing the program.
gram, it is of special importance to ensure that
Organizations that cannot provide data on
beneficiaries are receiving appropriate treat-
plan operations and on the use and cost of
ment by analyzing which services are pro-
services should be excluded from participa-
vided and by monitoring the adequacy of ac-
tion because without such data they cannot
cess to ambulatory care.
be a cost-effective partner for the state.
Planning. Future planning requires systems
ADDRESS THE STATE'S MANAGE-
that can estimate costs of program modifica-
MENT RESPONSIBILITIES.
tions and future program
Many of the early problems in
costs, identify areas that pro-
implementing the AHCCCS
"Integral to the
mote long-run cost contain-
program were related to not
ment, and research areas for
having effective systems in
success of a state's
general study.
place to deal with the state's
managed care
Coordination with other states.
management responsibilities.
States should participate in
Not having financial manage-
program is the
developing structures and
ment structures in place re-
involvement of the
processes that support na-
sulted in Arizona's not being
tional standardization of data
able to detect impending plan
governor, key legis-
collection, sharing of technical
bankruptcies until they were
lators, and their
knowledge, evaluating what
198
imminent. In the early pro-
staffs."
works and what does not, and
gram years, quality assurance
sharing ideas through collabo-
activities, utilization and ac-
rative forums.
cess monitoring, and program planning func-
FOSTER WORKING RELATIONSHIPS
tions had no leadership and few operating
WITH THE GOVERNOR, KEY LEGISLA-
mechanisms. Early attention to performance
TORS, AND THE MEDIA. Integral to the suc-
in these areas is critical to a well-functioning
cess of a state's managed care program is the
program, which can avert quality and access
involvement of the governor, key legislators,
problems.
and their staffs. In Arizona both the legisla-
Financial management. Contracting entities
ture and the governor were supportive of the
must be monitored for financial solvency. If
program during its early years. This support
plan failures occur, the stability of the pro-
was unwavering despite substantial problems
gram is threatened. Monitoring the plans can
in the program's administration during its
help to identify problems before they become
first eighteen months. Fostering strong rela-
critical or provide early warnings to help a
tionships with the legislature and governor is
state make arrangements for a plan's orderly
even more critical today. In an era of concern.
phaseout. The state's ability to secure com-
about state spending, strong marketing will
petitive rates also depends on the availability
be necessary to convince policymakers to allo-
of accurate data on costs.
cate sufficient resources for infrastructure de-
Quality assurance. Quality assurance activities
velopment. Without this development, a state
require early and concerted energy. Important
runs a serious risk of problems with access,
areas include activities to detect underuse of
quality of care, and plan viability.
services, review of treatment patterns by diag-
Program staff should include a press
nosis, monitoring of selected procedures, detec-
spokesperson who briefs the media regularly
tion of fraud and abuse, and profiling of plans
about what the state is trying to accomplish
and physicians for quality and appropriateness.
and who serves as a contact person for spe-
HEALTH AFFAIRS Volume 16, Number 4
HEALTH TRACKING: FROM THE FIELD
cific problems or concerns. AHCCCS had
AHCCCS program at the conclusion of the evalu-
daily negative press coverage in its first year,
ations; and present and former AHCCCS staff mem-
which was exacerbated by the lack of staff to
bers. The author also acknowledges Diane Rowland
represent AHCCCS's positions to the press.
and Alina Salganicoff from the Kaiser Family Foun-
In the early implementation stages of any new
dation, Stephen Somers from the Center for Health
program, there are likely to be problems.
Care Strategies, Inc., and Jodi Korb of Laguna Re-
These problems have less potential to explode
search Associates for their comments on an earlier
if members of the media are familiar with the
version of this paper.
program and its aims and have a specific per-
NOTES
son to contact when they have questions.
1. This paper is based on results from two six-year
SUPPORT THE DEVELOPMENT OF
Health Care Financing Administration (HCFA)
NATIONAL REPORTING STANDARDS. Re-
evaluations of AHCCCS. Detail on the method-
porting formats should include detailed defi-
ologies, findings, and policy conclusions are
nitions for each element to be included in en-
available in HCFA evaluation reports, discussion
counter data, financial reports, quality
papers, articles submitted for publication, and
published articles. A complete list of these docu-
assessment instruments, satisfaction surveys,
ments is available from the author on request, at
and grievance reports. These standards for
Laguna Research Associates, Suite 1190, 455
data collection will not only help the state to
Market Street, San Francisco, California 94105.
attract qualified contracting entities and
2. Arizona has attempted to get a waiver from
thereby support market competitiveness, but
HCFA to integrate Medicare and Medicaid fi-
nancing but has been unsuccessful.
they also have wide societal uses. Data sets
3. Two of the counties and the Arizona Depart-
that are integrated across several states can be
ment of Economic Security are mandated con-
used to determine disease incidence, docu-
tractors. Three counties became contractors
ment treatment trends, develop knowledge
through legislatively mandated county right of
199
on the success of treatments, and provide a
first refusal in effect until July 1995. The two
private entities were selected through a com-
database for general research inquiry. Such a
petitive bidding process.
database will make it possible to improve
4. The ALTCS program as a whole has a HCFA-
health care for all Americans, not just those
imposed cap on the percentage of elderly and
eligible for Medicaid.
physically disabled beneficiaries that can be
served in home care. Originally set at 10 percent
This paper was prepared in part with funds from The
of beneficiaries, it was slowly raised as the pro-
gram's use of home care was demonstrated to be
Henry J. Kaiser Family Foundation. It is based on
cost-effective. The rate was 40 percent in fiscal
work funded under Health Care Financing Admini-
year 1995.
stration (HCFA) Contract nos. 500-83-0027 and
5. The analyses described were limited by the avail-
500-89-0067. The analysis and conclusions are solely
ability of data and especially by the lack of base-
those of the author and do not express any official
line information on Arizona's experiences before
the program was implemented.
opinion or endorsement by the Kaiser Family Founda-
6. The per capita costs of the traditional Medicaid
tion or HCFA. The author thanks the many persons
program in Arizona were calculated from HCFA
who contributed to the two HCFA evaluations of the
Reports 2082s and 64s.
Arizona Health Care Cost Containment System
7. The methods used were based on The Urban In-
Demonstration: her coauthors of the AHCCCS
stitute Type of Service Classification System,
adapted by Laguna Research Associates for
evaluation reports: Donald Balaban, Ellen Jones
Medicaid beneficiaries.
Bauer, Michael Crane, Suzanne Pollack Driver, Susan
8. The risk of institutionalization was developed
Haber, Jodi Korb, Stanley Moore, Lynn Paringer,
with data from the Institutional Population
Gordon Trapnell, Pamela Turner, Alice Wade,
Component of the 1987 National Medical Expen-
William Weissert, John Wilkin, and C. William
diture Survey.
Wrightson; Sidney Trieger, Paul Lichtenstein, William
England, Ronald Lambert, James Hadley, Joan Peterson,
and Henry Tyson of HCFA; Mabel Chen and Linda
Redman, the director and deputy director of the
HEALTH AFFAIRS July/August 1997
PERSPECTIVE
in 1996, to maintain this
a constant basis, 29,000
reflecting the fact that
and on Medicaid. Fewer
Beyond The Safety Net In Dallas
patients disenrolled from
a competing HMO.
Structural solutions are needed for the structural problems of the safety net.
partners. Although main-
by Ron J. Anderson and Paul J. Boumbullan
population through par-
edicaid HMO was critical,
P
ARKLAND MEMORIAL HOSPITAL is one
centers, five school-based clinics, and two
serving other populations
of this nation's largest, most active institu-
mobile clinics. Parkland has learned over the
Recently, another new
tions making up the health care safety net. It
past ten years that to truly improve health, it
that includes a number
has served the residents of Dallas County
must address the social and economic deter-
or government hospi-
(Texas) for more than a hundred years.
minants of disease such as lifestyle, education,
Colorado. They share the de-
Just ten years ago, Parkland was a large,
and employment opportunities. This means
in governance while wish-
centrally located hospital, which, while recog-
working with school districts, housing
enefits of a provider network.
nized for its volume of service, excellence in
authorities, police and fire departments,
joined this entity. How-
patient care, and high-quality postgraduate
churches and synagogues, and employers.
cannot yet be assessed.
medical training programs, was not known for
These efforts have begun to bear fruit. In 1995
excellence and new markets.
its amenities or for having a patient-centered
a study was completed that compared COPC
competitive environment, it is
environment. Over the course of the past dec-
patients to non-COPC area residents. COPC
Denver Health obtain new pa-
ade, Parkland has transformed itself. It is now
patients were two times less likely to be ad-
that fit within its safety-net
an integrated health care system. It has cre-
mitted through the emergency department,
also provide additional reve-
ated centers of excellence that make available
had shorter hospital stays (3.4 days versus 5.3
27
the provision of care for the
to the entire community the latest knowl-
days, on average), and had 50 percent lower
such efforts are the aggres-
edge in such areas as arrhythmia manage-
charges.¹
of centers of excellence in
ment, cerebral vascular disease, epilepsy, and
in prisoner care. The former
gastrointestinal treatment. It also has devel-
Solving Structural Problems
safety-net mission of caring for
oped its own health maintenance organiza-
To pay for the decentralized system of com-
of the entire population; the
tion (HMO). In addition, it has gone through
munity care and its educational and research
mission of caring for the needs
extensive reengineering. These efforts have
missions, Parkland has had to diversify its
ulations.
produced a decline in the average length-of-
revenue streams and cross-subsidize. Fifteen
efforts to provide a strong
stay from seven days in 1986 to fewer than five
years ago, 66 percent of Parkland's funding
safety-net system appear to
days in 1995; a reduction in emergency depart-
came from local property taxes. Today only 33
and are approaches that should
ment visits from more than 160,000 visits in
percent of its funds come from that source.
by other similar systems.
1987 to 122,495 visits in 1995; and a reduction
This shift was accomplished primarily by
in average "dwell" time in the outpatient clinic,
means of an increased Medicaid entitlement
paper was presented at The Robert
including all diagnostic studies and pharmacy
Foundation/Health Affairs/Alpha the Safety
in Texas and through Medicare and commer-
services, from 7.5 hours to 2.5 hours.
cial payments for services provided through
"What
Is
Happening
to
Parkland decentralized by developing a na-
Parkland's centers of excellence. As Parkland
1997, Washington, D.C.
tionally recognized primary care delivery sys-
has worked toward providing relief to local
tem based on a community-oriented primary
communication with Larry Wall, direct
care (COPC) model, which aims to improve
taxpayers while expanding community serv-
care for both individuals and communities.
ices and maintaining its missions, it has be-
Hospitals Reference Guide to Financial Hos
Hospital Association.
The COPC network now includes eight com-
come more vulnerable in several ways.
munity health centers, nine youth and family
Maintaining market share. First, even
Data, 1991 through 1996). 1995 (Colorado
though Parkland prevents many unnecessary
ssociation,
July
Anderson, a physician, is president and chief executive officer of Parkland Memorial Hospital in Dallas,
Paul Boumbulian is senior vice-president of Parkland.
4
AFFAIRS - July/August 1997
to People Health Foundation, Inc.
PERSPECTIVE
hospital admissions, it does not "save money,"
sons who lack coverage.
because beds that would be empty in a closed
Business versus safety-net ethic.
HMO system are filled at Parkland with un-
While Parkland has attempted to improve the
managed, uninsured, high-cost patients who
health status of its patients and the commu-
fell out of the market basket.
nity, others have been busy trying to refine the
Second, as traditional commercial insur-
"sick care" system-learning how to trans-
ance has dwindled and managed care has re-
form clinical services into commodities and
duced the margins on other patients, the
patients to "covered lives." Risk selection has
Medicaid market (especially uncomplicated
become far more profitable than true innova-
obstetrical cases) has become more appealing
tion. We are finding that what is a good com-
to other hospitals with excess capacity. Com-
modity may not be what is good for the com-
petition for these patients has resulted in a
munity's health. It is difficult for the public to
loss of approximately 2,000 deliveries per year
understand what is to be gained in preserving
at Parkland.
safety-net "utility" services such as trauma,
Through the efforts of the medical school
burn, and neonatal care and specialized drugs
faculty, Parkland has a low cesarean-section
for patients with human immunodeficiency
rate (18 percent), whereas some of the recent
virus (HIV)/acquired immunodeficiency syn-
entrants into the Medicaid market have rates
drome (AIDS), as few citizens have direct
more than twice as high. Parkland and the
contact with these services. Most healthy
medical school also have achieved an infant
people never consider their vulnerability to
mortality rate for African Americans that is
injury or catastrophic illness, much less that
essentially equal to the rate for whites (na-
of their community to natural and man-made
28
tionally it is two and one-half times higher).
disasters.
However, this breakthrough has not been ac-
Building social capital. The means for
knowledged by the local market, where other
addressing the determinants of health reside
institutions trade on amenities rather than
not in the efficiencies of the market but in
outcomes. Women and their newborns who
what Robert Putnam termed social capital, that
are served by other institutions are routinely
is, the bonding that characterizes a strong
transferred to the Parkland system after
civil society.² Communities with rich net-
Medicaid is discontinued or if complications
works of nonmarket relationships provide a
arise.
sense of trust, sharing, and cooperation that
Third, Parkland always will be subject to
increases the efficiency of human relation-
adverse selection by virtue of its mandate:
ships. Yet most of the dollars available to affect
Any patient can enter the system by being
health status remain in the business of curing.
sick or injured any day of the year.
Some of the public systems that make up
The Medicaid situation is poised to be-
the safety net, a few of the not-for-profit insti-
come even more distressing. Parkland now
tutions, and a very limited number of the for-
has 60 percent of the Medicaid market share
profit systems have recognized this situation.
in Dallas County. Under the proposed state
These foresighted organizations are begin-
Medicaid managed care program, Medicaid
ning to establish partnerships with other
patients will be distributed among three or
public or nonprofit institutions to improve
four managed care vendors, and although
health. Current market incentives may
Parkland will inevitably be one of these
lethally harm these institutions and leave in-
providers, it would be foolish to assume that
efficient, ineffective, and bureaucratic institu-
it can maintain its current market share. The
tions unharmed. Policymakers should not
loss of this revenue will jeopardize the sys-
preserve publicly sponsored health care insti-
tem's ability to provide educational, research,
tutions for the sake of publicly sponsored
and mandated services, particularly to per-
health care. What should be preserved is a
HEALTH AFFAIRS Volume 16, Number 4
PERSPECTIVE: SAFETY NET
system of choice by patients. Monolithic pal-
which creates a windfall for the managed care
aces of patronage and institutions that treat
organization.
patients as captives in a disease-oriented sick
Legislative support also will be required to
care system should be reengineered, redi-
support safety-net pricing, especially with re-
rected, and held to high standards of account-
gard to pharmaceuticals for special popula-
ability for clinical outcomes, patient satisfac-
tions. We are especially concerned about
tion, and community health status. A civil
pharmaceutical support for HIV/AIDS popu-
servant mentality must give way to servant
lations because their care is often provided by
leadership and community partnership.
only a few hospitals in a given area. Pharma-
ceuticals are part of the safety net but are not
Summary And Recommendations
always provided at present.
Without these structural changes, we will
The current structural problem, wherein
continue to see the results of failing federal
safety-net institutions must operate not only
and state policies into the next millennium.
in the marketplace but also under state man-
Their failure will ultimately come down hard
dates to provide utility services, must be rec-
on local governments as unfunded mandates.
onciled through structural change. That
Communities strapped for revenues to meet
means that an all-payer system is required to
challenges of devolution ultimately will be re-
support medical education and provide for the
quired to reduce services. Unless some funda-
"stand-ready" costs of services such as trauma,
mental change is made, they will focus only on
burn, and neonatal intensive care. Reimburse-
the "resurrection medicine" of the emergency
ment strategies must acknowledge not only se-
room and pull back from real innovation and
verity of illness but also social severity. The pro-
real reform capable of improving the health
29
vision of care to large numbers of low-income
and productivity of all of our nation's resi-
persons carries a real cost for "wraparound"
services that lower barriers to care.
dents. We do have a structural problem that
needs a structural solution, but we also need a
Safety-net institutions should also provide
change in our hearts to better understand that
incentives to maintain or create a community
we cannot leave needed reform of the health
health care infrastructure that enhances the
care delivery system to the invisible hand of
health status of the community, particularly
the marketplace.
in underserved inner-city and rural areas. This
could include the development and mainte-
A version of this paper was presented at The Robert
nance of comprehensive primary care net-
Wood Johnson Foundation/Health Affairs/Alpha
works in underserved communities. Reim-
Center conference, "What Is Happening to the Safety
bursement methodologies and grant awards
Net?," '9-10 January 1997, in Washington, D.C.
should foster collaborative models and not
create disruptive competitive behaviors that
NOTES
undermine community partnerships.
1. Y.M. Coyle and P.J. Boumbulian, Parkland's COPC
Funds need to be made available for
Evaluation System (Unpublished quality manage-
ment report, 1995).
outcomes-oriented research. Both safety-net
2. R.D. Putnam, "The Prosperous Community: So-
and other providers must be able to show that
cial Capital and Public Affairs," The American Pros-
investments of new dollars or redirected dol-
pect (Spring 1993): 2; and R.G. Evans and G.L.
lars lead to desired results. Safety-net institu-
Stoddard, "Producing Health, Consuming
tions should directly receive direct and indi-
Health Care," Social Science and Medicine, 31, no. 12
rect payments for medical education and
(1990): 1347-1363.
disproportionate-share adjustments for car-
ing for a large volume of low-income persons
instead of leaving these payments in the ad-
justed average per capita cost (AAPCC),
HEALTH AFFAIRS July/August 1997
MEDICAID MANAGED CARE
nd. I've been to NIH, and
going on there, which is
have NIH and its advisory
Medicaid Managed Care
sions on research funding.
fiscal 1998, do you favor
And Community
thorization?
funded. The more of these
Providers: New
rs delve into-such as the
he potential for improving
H has reasonable funding to
Partnerships
Can the "arranged marriage" of managed care plans with
traditional community-based providers improve care for the poor?
ring most of your working
day? Is it as satisfying as it
by Debra J. Lipson
appreciated by the public
ust of government a healthy
PROLOGUE: Partnerships between organizations are often
or do you view it otherwise?
compared to marriages-some are based on necessity, some on
em now of being presumed a
convenience, some on synergy, and others on arrangements made
heartening. But I get so much
by third parties. Harvard professor Rosabeth Moss Kanter
rough to correct things. It is
describes five stages in the development of organizational
progress, to feel good about
alliances: engagement, selection or courtship, setting up
SAFETY NET
91
That is so rewarding that I
housekeeping, learning to collaborate, and changing within. The
rious about your long friend-
ability of organizations to progress through these stages depends
rity leader, who's obviously a
on the dynamics between them and around them. But ultimately,
are. How would you charac-
the endurance of an organizational partnership, just as some
erybody knows that you sing
would say of marriage, depends on the continued mutual benefit
or is it just
of the alliance to each of the participants.
y-two years now, first in the
This paper by Debra Lipson explores the "arranged marriage"
m, and I think he respects me.
of community-based health care providers and managed care
he feels, and we have main-
plans. Although these two entities make strange bedfellows,
knows that I can get things
they have courted each other for the opportunity to draw on
things done.
elped you repel some of the
each other's strengths in an increasingly competitive
ing of the chairmanship?
marketplace. As they come together to negotiate contracts for
hat mainly his help was based
serving Medicaid patients, will they learn to collaborate or find
it things done. He has a sincere
a way to fulfill their missions and financial objectives
party but on a bipartisan basis.
independently? Here Lipson looks at what is at stake and at the
one. We don't always agree on
prospects for their success.
ght to be done, but we share a
Until June of this year, Lipson was associate director of the
Alpha Center, a nonprofit health policy research organization in
Washington, D.C. In honor of her own commitment to
marriage, she has since moved with her husband to Geneva,
Switzerland, where she will complete studies in progress and
seek new alliances with international health organizations.
r
+
HEALTH AFFAIRS July/August 1997
1997 The People-to-People Health Foundation. Inc.
SAFETY NET
ABSTRACT: Growing enrollment in managed care plans among Medicaid recipi-
ents represents a new market for these plans but presents challenges to those
providers that traditionally have served this population. To continue serving
Medicaid patients, community-based providers must develop contracts or other
types of partnerships with Medicaid-contracting health plans. This paper reviews
the challenges to such collaboration and discusses the practical issues that
plans and community-based providers must resolve to develop productive work-
ing relationships. Keys to successful collaboration are identified. Ways in which
federal and state governments can help the collaborative process are suggested.
Y JUNE 1996, 13.3 MILLION Medicaid recipients were en-
B
rolled in some form of managed care, 40 percent of all Medic-
aid eligibles and nearly twice the proportion two years earlier.¹
The growth curve will surge upward again in 1997 as large states
such as California, Illinois, and New York attempt to enroll large
numbers of Medicaid recipients into managed care plans or expand
Medicaid managed care programs into additional counties. States
began their enrollment in managed care with women and children
who qualify for Medicaid, and they are turning their attention to
elderly and disabled recipients, who have been largely exempt from
mandatory managed care enrollment policies.
92
MEDICAID
The growth of Medicaid managed care has spawned new interest
on the part of private managed care plans in serving the Medicaid
population. In some cases, plans that have contracted with Medic-
aid for many years are expanding their capacity to serve additional
patients. However, as more states jump on the Medicaid managed
care bandwagon, plans without prior experience in serving Medic-
aid patients and brand-new plans are diving into the Medicaid mar-
ket as never before. Thirty-eight percent of health maintenance or-
ganizations (HMOs) and preferred provider organizations (PPOs)
surveyed by the Group Health Association of America (now the
American Association of Health Plans) in 1995 participated in
Medicaid at the end of 1994; another 11 percent began serving
Medicaid patients in 1995, and another 12 percent intended to do so
in 1996.² This trend is good news for Medicaid officials, who had
trouble recruiting enough plans and providers to serve Medicaid
patients.
However, there are a number of concerns about the rapid entry of
so many new plans into Medicaid managed care. For example, plans
new to the Medicaid market sometimes have underestimated the
amount of enabling services, such as case management, language
translation, and outreach, needed to serve the Medicaid population.
The entry of such plans into the Medicaid market also raises con-
cerns about how community-based providers that previously had
large Medicaid caseloads will fare under these new arrangements.
HEALTH AFFAIRS Volume 16, Number 4
MEDICAID MANAGED CARE
Traditional community-based providers are the organizations
that historically have provided much of the primary and preventive
care delivered to Medicaid recipients and the uninsured.³ These
providers include approximately 635 community and migrant
health centers with 1,647 sites; more than 3,000 rural health clinics;
nearly 3,000 city and county health departments; and a multitude of
maternal and child health clinics, specialty clinics for children with
special health care needs, school-based clinics, family planning clin-
ics, and acquired immunodeficiency syndrome (AIDS) care provid-
ers (operating under the Ryan White Comprehensive AIDS Re-
search and Education [CARE] Act). Although each community has
a different mix of such providers, some or all of them form the
primary and preventive "safety net" for the poor and uninsured.
Approximately 43 percent of patients in federally qualified commu-
nity and migrant health centers are covered by Medicaid, Medicare,
or other public insurance, and an equal proportion are uninsured.
To survive, the centers rely heavily on federal, state, or local govern-
ment grants and to a lesser extent on private donations.
Given their dependence on Medicaid, it is imperative that
community-based providers participate in evolving Medicaid man-
aged care plans and networks. If they do not, they may lose the
SAFETY NET
93
ability to serve Medicaid patients, which in turn could threaten
their ability to serve uninsured patients.
Community-based providers have two major strategies for par-
ticipating in Medicaid managed care. They can form a managed care
plan by themselves or in partnership with others, or they can seek
contracts with managed care plans. This paper focuses on the sec-
ond strategy. First, I explain the issues that have arisen as Medicaid
managed care plans seek to develop provider networks that can
serve the diverse Medicaid population and negotiate contracts with
traditional community-based providers. I then highlight some of the
strategies and elements that have proven effective in overcoming
barriers to mutually beneficial contracts. I conclude by discussing
the policy implications for federal and state governments in their
role as purchasers of care for the Medicaid population.
Challenges And Opportunities For Collaboration
Why would private managed care plans want to contract with
community-based providers of primary and preventive care to
Medicaid patients? Primarily because they share the same mis-
sion-providing high-quality, easily accessible primary and preven-
tive care services to Medicaid patients. But they differ in how they
approach this mission, based on different organizational cultures
and strengths.⁵ Just as state health departments and Medicaid agen-
HEALTH AFFAIRS July/August 1997
SAFETY NET
cies used to engage in what was once called the "Cold War between
the health zealots and the Medicaid infidels," community-based
providers and managed care plans today often view each other with
suspicion.6
Managed care organizations (MCOs) typically have experience
in claims processing, provider relations, utilization review, and fi-
nancial risk management. As insurers, they are focused on purchas-
ers and enrollees, most of whom have been commercially insured. If
nonprofit, they are accountable for financial performance to boards
of directors; if for-profit, they are accountable to stockholders. In
contrast, community-based providers have experience in providing
personal health care services to "vulnerable" persons-those with
low incomes, special health care needs, or cultural or language barri-
ers to care-regardless of ability to pay. It is their mission to provide
care to the uninsured; in some cases they are obligated to do so. They
are accountable to consumer-dominated boards of directors or to
governmental bodies if they are publicly sponsored or funded. These
different cultures and strengths present both challenges and oppor-
tunities for collaboration.
Challenges. The two organizations come to the negotiating
94
MEDICAID
table speaking different languages, using the same words to mean
different things. For example, to MCOs, "case management" is the
responsibility of primary care physicians to coordinate and author-
ize all of the care needed by patients. But to community-based
providers, case management is often the responsibility of social
workers, nurses, or community health aides to assess patients'
needs, refer patients to all appropriate services, and advocate on
patients' behalf to assure access to care.
There are also many stereotypes that must be broken down be-
fore real collaboration can occur. MCOs may assume that all
community-based providers serve high-risk, sicker populations,
which would increase the risk of adverse selection for MCOs that
have community-based providers in their provider network. There
may also be the misconception that most community-based provid-
ers are unable to comply with HMOs' utilization controls and qual-
ity assurance processes. Some community-based providers believe
that MCOs' only concern is the bottom line and that MCOs are not
committed to providing the full range of services needed to effec-
tively serve vulnerable populations.
Opportunities. Despite these differences, private managed care
plans and community-based providers are drawn to each other for a
number of reasons, even if it sometimes seems more like an arranged
marriage than love at first sight. MCOs find community-based
providers attractive because they have experience serving the
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MEDICAID MANAGED CARE
Medicaid population, a powerful advantage for any MCO that has
not worked with this group of patients before. "Community provid-
ers have leverage, if they're good," said David O'Brien of the Gateway
Health Plan in Pittsburgh. "If a community-based provider func-
tions well and is well-thought-of in a particular community, a plan
will need to include that provider in its network if it wants to
attract members from that community." MCOs readily acknowl-
edge that they do not know how to deliver care to a less-educated
population, how to help patients get to appointments, and how to
communicate the importance of prevention and early treatment.
They find that community-based providers are particularly strong in
providing enabling services. "The most I've learned from anyone
about the Medicaid population is from the community-based
providers," said John Monahan of Blue Cross of California. In addi-
tion, MCOs find that community-based providers may be among the
few, or perhaps the only, providers of primary care services to
Medicaid patients in some neighborhoods. One plan turned to
community-based providers after it tried to sign up physicians in its
commercial plan to serve Medicaid patients but was unable to con-
vince enough physicians to serve the number of such patients ex-
pected to enroll. In other communities, community-based providers
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95
may be the only source of particular services required by the state
Medicaid agency, such as maternity care coordination or human im-
munodeficiency virus (HIV) counseling. Finally, MCOs may perceive
efficiencies in having low-income residents, who frequently go on
and off Medicaid, see the same provider regardless of their eligibility.
Community-based providers find that they need to court MCOs
for many reasons, as well. As mentioned earlier, contracts with
MCOs are essential to continue provider/patient relationships with
Medicaid beneficiaries and to retain Medicaid revenues. This is par-
ticularly true if community providers cannot or choose not to form
their own MCOs. Community-based providers find that being part
of an MCO provider network gives them access to information sys-
tems, management expertise, and specialty clinical services that
might otherwise be unavailable or unaffordable. Finally, the experi-
ence of dealing with Medicaid managed care can give community-
based providers the tools they need to be more competitive.
Major Contracting Issues
As plans and community-based providers dance closer together, they
are just starting to come to grips with the details and issues that go
into contracting. Before contracts can be signed, community-based
providers and MCOs must decide on (1) the role and authority of the
provider in relation to other parts of the delivery system; (2) which
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quality and basic operating standards must be met and how compli-
ance will be monitored; and (3) the basis on which payments will be
made. Finding common ground on these issues is rarely easy.
Providers' scope of responsibilities. Depending on what is
included in the contract between a state Medicaid agency and man-
aged care plans, Medicaid MCOs need to arrange for a wide array of
clinical and supportive services. It is administratively simpler for
MCOs to contract with providers that can deliver a comprehensive
set of services. But other than community health centers, most
community-based providers can only deliver pieces of the package.
MCOs that contract with multiple community-based providers
must decide whether preauthorization from a primary care physi-
cian will be needed for every visit, which services require prior
authorization, whether there are certain conditions for which pa-
tients need not get authorization from their primary care provider,
and whether they will guarantee a minimum number of referrals to
the community-based provider. The two parties must also decide
how case management will work.
Quality assurance and reporting requirements. Defining
"high-quality" care can be difficult when the two parties are ac-
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countable to different accreditation bodies that emphasize different
aspects of quality, have different standards, and require reporting of
different indicators and measures. Health plans are oriented to Na-
tional Committee for Quality Assurance (NCQA) standards and
Health Plan Employer Data and Information Set (HEDIS) measures,
whereas community-based providers are accountable to a variety of
government and private organizations and report various data de-
pending on funding sources. For example, community and migrant
health centers follow federal rules, local health departments use the
Assessment Protocol for Excellence in Public Health system to as-
sess and improve their organizational performance, and Ryan White
centers have their own federal requirements.
Individual providers also complain about the conflicting require-
ments imposed by health plans. Zoila Torres-Feldman, a community
health center director in Massachusetts, said, "Each plan has differ-
ent formularies, different labs, separate utilization review staff, dif-
ferent benefit packages, different hospitalization contracts, differ-
ent networks of specialists, and different expectations of the levels
of provider control."
MCOs sometimes criticize the capacity of community-based
providers to meet basic operational expectations, such as submit-
ting utilization and quality data in formats that are consistent with
plans' information systems, answering telephone lines in a timely
fashion, and making appointments available within required time-
HEALTH AFFAIRS Volume 16, Number 4
MEDICAID MANAGED CARE
"Payment between plans and community-based providers is one of
the most important and difficult issues in contract negotiations."
lines. According to Herb Wheeler of HealthKeepers, Inc., a subsidi-
ary of Trigon Blue Cross Blue Shield, in Richmond, Virginia, "In
trying to gain NCQA accreditation, we feel like we're being pulled
down if we deal with community health centers." He and other
health plan officials say that not all community-based providers'
record keeping and quality of care are yet up to NCQA's credential-
ing standards.
Payment arrangements. Payment between plans and
community-based providers is one of the most important and diffi-
cult issues in contract negotiations. Community-based providers
typically want fees to cover the costs of providing all care to patients,
whereas MCOs want to pay the same amount they pay other provid-
ers for the same services. Some MCOs complain that community-
based providers do not have adequate information systems to deter-
mine unit costs, and some community-based providers say that
MCOs do not want to pay adequately for the additional services
they provide.
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97
Most plans and community-based providers believe that few
such providers are equipped to accept financial risk for the entire
spectrum of services patients need. Their data systems are ill-
equipped to manage utilization, their financial systems are not so-
phisticated enough, and sometimes they are legally unable to suffer
even short-term financial losses. "Community health centers could
survive if they can share in the savings they generate for the health
plans," said Torres-Feldman. But if community-based providers are
only capitated for primary care, they could lose money.
Strategies For Contracting Collaboration
The growing number of contracts between MCOs and community-
based providers indicates that many have overcome the obstacles in
order to gain the potential benefits. The examples presented here
demonstrate that the secret to success lies in translating contract
requirements into practical working relationships.
Providers' scope of responsibility. In some cases MCOs con-
tract with community-based providers for a limited set of services
initially and increase the scope of services included in the contract
as the providers' expertise expands. For example, Blue Cross of
California's HMO initially contracted with a Planned Parenthood
clinic for just family planning and obstetrical services but expanded
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the contract to include primary care services when the clinic devel-
oped the capacity to provide them. When community-based provid-
ers can deliver only a specific component of the service package,
some plans have authorized the providers to deliver all necessary
care without requiring referrals for each visit. In a study of seven
school-based clinics, for example, nineteen of twenty-six health
plan contracts authorized the clinics "to provide a specific set of
services-typically well-child visits and acute, episodic sick
care-to the plan's beneficiaries without preauthorization by the
plan." The Health Start school-based clinics in St. Paul, Minnesota,
developed three different models for relating to primary care provid-
ers in health plans, depending on each plan's particular needs.8
Quality assurance and reporting requirements. NCQA ac-
creditation standards and HEDIS 3.0 measures, which recently in-
corporated Medicaid HEDIS, are becoming the industry standard.
As more Medicaid agencies use them to hold contracting health
plans accountable, they have become de rigueur for plans and their
providers to follow. But how plans meet such standards may differ
from one plan to the next. When working with community-based
providers, plans often find that they must work closely through
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joint quality assurance committees, provide data that show provid-
ers how their practice patterns compare with those of others, and
agree on priorities for improvement. For example, one publicly
sponsored health plan (CareOregon) holds monthly quality im-
provement and utilization committee meetings with community
health centers in its network to educate both plan and clinic repre-
sentatives about meeting quality assurance requirements.
On the other hand, some community-based providers may be able
to show other providers in a plan's network how to meet certain
standards. As John Bartkowski, a community health center director
in Wisconsin, pointed out, "The health centers bring to the HMOs
the ability to meet Early and Periodic Screening, Detection, and
Treatment [EPSDT] requirements. We also were able to demon-
strate that health centers are much better on certain outcomes [for
example, emergency room visits, low-birthweight rates] than other
contracted physicians."
Still, plans sometimes find that community-based providers re-
quire technical assistance and funds to meet quality, utilization, or
other reporting expectations. One health plan that was created by
community health centers allocates half of its annual earnings to
community providers to invest in infrastructure; in recent years
management information systems have been the priority for these
funds. A commercial health plan has provided computer hardware
and software to several community-based providers to enable them
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MEDICAID MANAGED CARE
to bill for services and comply with prior-authorization require-
ments. In addition, MCOs may provide community-based providers
with information about their patients' overall utilization patterns to
help manage care more effectively and EPSDT check-up lists to help
with follow-up. Trigon provided funds to a group of minority physi-
cians to help them organize into a group, hire administrative staff,
and collect data.
Patience and willingness to educate community-based providers
about administrative practices are also necessary. One plan official
expressed frustration with county health departments that have inade-
quate or nonexistent appointment systems and other community-
based providers that cannot meet reporting or performance stan-
dards. But the plan is giving these providers time to get up to speed
because they are regarded as valuable partners for ensuring access
and service capacity. Community-based providers are clearly will-
ing and able to change. One study found that contracts with man-
aged care plans had prompted management improvements at com-
munity health centers, such as strengthening twenty-four-hour
on-call service, more timely scheduling of appointments, and more
active monitoring of utilization and specialty referrals.¹⁰
Payment arrangements. Flexibility is the key to setting suit-
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99
able payment arrangements and rates. Many contracts between
plans and community-based providers still include fee-for-service
payments for each contracted service, based on previous Medicaid
fee schedules, fixed global visit rates, or a service-specific rate nego-
tiated by the provider and the plan. However, some plans have de-
veloped successful risk contracts with community-based providers.
Plan and provider representatives caution that to work well, such
arrangements require (1) experience on the part of providers, in
managing risk, and (2) substantial numbers of enrollees seeing the
provider. As Robert Gomez, head of a community health center in
Tucson, Arizona, said, "If you can talk capitation, you've broken a lot
of the cultural barriers between us and the plans."
Even when providers do not have prior experience in risk as-
sumption, some form of risk sharing can still be developed. For
example, in the first year of St. Paul Health Start's contracts with
MCOs, the plans held back a small portion of the rates paid to other
capitated clinics to fund school clinics while both parties collected
utilization data to set future rates. Another plan has several shared
risk contracts that "carve out capitation for services that CBPs
[community-based providers] perform and pay the rest on a fee-for-
service basis which we manage ourselves," according to Dan Bailey
of Compcare Health Services, an HMO owned by United Wisconsin
Services, Inc., the Blue Cross Blue Shield affiliate in Wisconsin.
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Some unusual payment arrangements are found in contracts be-
tween plans and community-based providers, which again reflects
the special needs of some providers and the willingness of plans to
be flexible. For example, Blue Cross of California pays for some
services provided by its community-based providers up front to help
with cash flow. The cost of intensive outreach such as home visits
for preventive services is not usually included in capitation rates, so
health plans and community providers sometimes cooperate in
seeking additional funding through public or private grants. The
Blue Cross Blue Shield plan in Wisconsin developed a risk-sharing
agreement with providers on EPSDT to give providers more incen-
tive to help the plan meet its screening goals.
While plans' payment arrangements with federally qualified
health centers are governed to a great extent by federal and state
regulations, which I discuss later, health plans and health centers
still have some options that form the basis for rate negotiations. For
example, the Blue Cross plan in California convinced one center to
waive cost-based reimbursement and accept capitation in exchange
for the promise of a larger volume of patients. It is not clear whether
the non-cost-based payment rates will be adequate in the long run."
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Keys To Successful Contracting
This brief review highlights several factors that are critical to suc-
cessful Medicaid contracting.¹²
(1) The parties to a contract must learn as much as they can about
each other-their language, values, and goals. The differences that
exist among MCOs and community-based providers are important
when considering the pros and cons of a particular contract. Local
market factors also influence the dynamics of contracting.
(2) To meet the needs of Medicaid patients, both parties must be
willing to cast aside "business as usual." Health plans that believe
that community-based providers are valuable partners must be will-
ing to trust what has been learned and invest in the services that are
needed to make a difference (for example, offering services in multi-
ple languages, respecting the influence of culture on health-seeking
behavior, and developing special exceptions for confidential serv-
ices). Plans may need to stretch usual primary care physician
authorization requirements, while community-based providers may
need to hire new staff to perform the tasks required by MCOs.
(3) Plans and community-based providers must be willing to
meet regularly to work out the details of collaboration. Even when
managers agree to referral and authorization procedures, there will
always be special cases that require accommodation and compro-
mise. It may be useful to start with something small before embark-
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MEDICAID MANAGED CARE
ing on a long-term contract.
(4) Plans and community-based providers must be willing to
experiment with different payment arrangements. Because not all
community-based providers are alike (some can handle capitated
rates, others cannot), and because each state's Medicaid program is
different (capitation rates in some states may be meager, some have
more sophisticated risk-adjustment mechanisms than others have),
MCOs and community-based providers must work together to re-
solve the array of payment issues that will arise.
(5) Community-based providers have shortcomings in informa-
tion systems and facilities, but these can be improved. These provid-
ers have limited capital budgets to invest in computer systems or
facility improvements. Plans must be willing either to invest in com-
munity-based providers' infrastructure or help them to find alterna-
tive sources of capital. Community-based providers must put a high
priority on finding the resources and technical staff to bring their
facilities and systems up to speed.
(6) Continuous quality improvement requires partnerships.
Community-based providers that deliver high-quality services and
have a good reputation in their community should have little diffi-
culty contracting with Medicaid MCOs. Those that do not continu-
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101
ously improve quality may not belong in Medicaid managed care. To
improve quality, plans, providers, consumers, and state agencies
must join together to collect and analyze data, conduct patient sat-
isfaction surveys, stress the importance of EPSDT screenings, and
improve risk-adjustment methods.
Policy Context
Contracts between Medicaid managed care plans and community-
based providers do not occur in a vacuum. They are greatly affected
by federal and state Medicaid laws and policies and by the specific
language in the contracts between state Medicaid agencies and
managed care plans. Thus, the relationships that evolve between
Medicaid managed care plans and community-based providers will
in part reflect the federal and state policies that govern them.
Federal policy. Most of the formal policies related to community-
based providers' relationships with MCOs emanate from the Health
Care Financing Administration (HCFA) through its administration
of state Medicaid waivers. Several other Department of Health and
Human Services (HHS) agencies are involved in providing technical
assistance.
State waivers of federal Medicaid regulations. Federal Medicaid law
(Sections 1115 and 1915(b) of the Social Security Act) grants HCFA -
the authority to grant waivers to states that wish to be exempt from
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certain rules.¹³ States with 1915(b) waivers must assure cost-based
reimbursement to federally qualified health centers participating in
managed care when they affirmatively assert their right to it. But
because states requesting Section 1115 waivers can ask to waive
health center payment rules, many centers have been forced to ac-
cept less than they formerly received. Even so, many of the states
with Section 1115 waivers still make some provisions that help feder-
ally qualified health centers to participate in or get adequate pay-
ment from Medicaid managed care plans.
In approving a state's Medicaid waiver program, HCFA may im-
pose special terms and conditions with which the state must com-
ply. Most often, these terms and conditions relate to rules that
MCOs must follow in reimbursing community-based providers and
to assuring access to services provided by community-based provid-
ers. For example, HCFA's special terms and conditions often include
a requirement that MCOs contract with community-based provid-
ers to assure that MCOs have adequate capacity to serve Medicaid
patients. If MCOs have adequate capacity to serve vulnerable popu-
lations without contracting with federally qualified health centers,
MCOs are relieved of this requirement. If health centers develop
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their own Medicaid managed care plan, other MCOs in the same
service area are also exempt from this condition. In most states
HCFA also requires states to adjust rates for patient case-mix.
Technical assistance and training for community-based providers and MCOs.
HHS agencies-including the Bureau of Primary Health Care, the
Maternal and Child Health Bureau, the Centers for Disease Control
and Prevention, and the Agency for Health Care Policy and Re-
search-conduct comprehensive training and technical assistance
programs to help community-based providers to participate in or
relate to Medicaid managed care programs. These agencies also pro-
vide information and training to MCOs on developing delivery sys-
tems for Medicaid patients.
State policies. Within the context of federal policies and
guidelines, states have adopted a range of approaches to ensure a
role for community-based providers in Medicaid managed care
plans. Some states have designed systems to assure that community-
based providers are given the chance to develop their own plans. For
example, California formulated a managed care model "designed in
large part to protect safety-net institutions."¹⁴ Medicaid recipients
in twelve densely populated counties will choose between two dif-
ferent plans-a commercial plan and a Local Initiative plan that is
developed by county governments and safety-net and traditional
Medi-Cal (California Medicaid) providers, along with community
representatives. "Unlike the commercial plans, Local Initiatives are
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MEDICAID MANAGED CARE
required to contract with safety-net and traditional providers."⁵
Rates paid to the Local Initiative plans are higher to reflect cost-
based payments made to federally qualified health centers.
However, most states have not gone this far. Instead, they are
using one or more of the following more limited strategies to encour-
age partnerships between community-based providers and MCOs.
(1) Contract requirements. Some states explicitly require that Medic-
aid managed care plans contract with particular community-based
providers. For example, Oregon mandates that Medicaid managed
care plans contract with county health departments and other pub-
licly funded programs to provide immunizations, as well as screen-
ing for sexually transmitted and other communicable diseases. Ex-
ceptions are allowed when community providers are not available.¹⁶
Minnesota's Medicaid program requires that at least one MCO in a
given service area include a community clinic in its network.
(2) Preference points for collaboration. Arizona, California, and Massa-
chusetts, among other states, add points to plans' bids if they in-
clude community providers in their networks." For example, Mas-
sachusetts specifies in its request for proposals that plans must
attempt to establish linkages, though not necessarily contracts,
with school-based clinics and encourages coordination with public
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103
health clinics to serve persons with HIV infection.
(3) Preferential assignment to plans that include community providers. In
some states Medicaid MCOs that include community-based provid-
ers are assigned patients who do not voluntarily choose a plan. For
instance, in California, the Orange County CalOPTIMA (Orange
Prevention and Treatment Integrated Medical Assistance) program
has made the plan organized by Children's Hospital of Orange
County and the University of California-Irvine the default for per-
sons who fail to select a plan.¹⁸
(4) Setting quality or access standards to encourage collaboration. Certain
performance standards in a state's contracts with health plans can
increase the likelihood that plans will contract with community-
based providers. For example, Minnesota requires health plans to
submit annual "action plans" that specify how they will deliver
services, provider capacity, quality improvement plans, and policies
and procedures for serving high-risk or special-needs populations.
This serves as an incentive for plans to work with community-based
providers that can provide care to special-needs groups.
(5) "Transitional" payments and other enhanced reimbursement to
community-based providers. To help federally qualified health centers or
other essential community providers to develop the systems and
economies of scale needed to assure cost-effectiveness while con-
tinuing to deliver health care to all persons regardless of their ability
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to pay, many states have developed transitional payments to feder-
ally qualified health centers. For example, Rhode Island pays an
extra $10 per member per month to the center's HMO for each
Medicaid recipient enrolled. And in Hawaii and Vermont, federally
qualified health centers in Medicaid managed care plans are entitled
to a "wraparound" payment to settle the difference between capita-
tion and cost. In addition, some states provide enhanced capitation
rates to plans that contract with federally qualified health centers to
compensate for a more costly patient case-mix. Minnesota adjusts
for a more costly case-mix in some safety net-sponsored plans.19
Next Steps
Federal and state policymakers often find themselves caught be-
tween the plans, which argue that strict governmental requirements
to contract with community-based providers or pay them certain
rates hurt the plans' ability to provide cost-effective care, and
community-based providers, which assert that the government
must protect them from competition that could threaten their finan-
cial viability. In an effort to find middle ground, HCFA and most
state Medicaid agencies have tried to ensure, at a minimum, that
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community-based providers are given a chance to participate in
Medicaid managed care plans, even if they cannot guarantee their
ultimate success. After all, federal and state governments have in-
vested in community-based providers through grants, loans, and
other support for several decades. If community-based providers are
forced to close as a result of competitive forces, and private managed
care plans decide to abandon the Medicaid market because it is not
sufficiently profitable (as some already have done), governments
will have to rebuild the entire care infrastructure for the poor. But if
community-based providers, which have always formed the safety
net, are given a greater chance of survival, they might constitute an
important "fallback."
Policies to improve provider competitiveness. If this re-
mains the preferred policy choice, there are avenues in addition to
those already mentioned that might make community-based
providers more competitive. For example, subsidies for care of the
uninsured and funds for capital investments (data systems and facil-
ity improvements) might make it easier for community-based
providers to accept discounted fees from managed care plans. Risk-
adjusted rates to plans might make it more likely that they would
contract with community-based providers that serve sicker groups
of people. For these to occur, MCOs might have to join with provid-
ers in the political process.
The question remains whether such policies are needed temporarily
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MEDICAID MANAGED CARE
or on a permanent basis. For example, some argue that it goes
against the economic interests of MCOs to contract with commu-
nity-based organizations that are not directly controlled by the
MCO. Robert Reischauer of The Brookings Institution stated, "A
managed care entity that wants to operate efficiently [would want]
to exercise complete control over the provision of services either
directly or by subcontracting that control through a risk-based con-
tract to some other provider." Based on this possibility, as MCOs
gain more experience in serving the Medicaid population, they may
find it more efficient to operate a van service to bring Medicaid
members to risk-assuming providers, rather than contract with
neighborhood-based providers that are seeking higher payments to
support their social mission.
Community-based providers may find that as they become better
at managing care and financial risk under capitation, they will be
better able to form their own managed care plans. Hospitals and
physician groups are now forming integrated delivery systems and
provider-sponsored networks that are trying to compete directly
with MCOs; some community-based providers are emulating this
strategy. If they are successful at managing risk and winning con-
tracts with Medicaid or other purchasers, they might be able to
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105
channel the savings or profits into services for the uninsured.
There are those who believe that contracts between Medicaid
MCOs and community-based providers will last because they bene-
fit both parties and result in higher-quality service and better out-
comes for Medicaid recipients. Others caution that no matter what
works best economically or from a health care delivery perspective,
politics will remain influential. "On the state level, which plans get
Medicaid contracts has to do with politics. In communities, which
providers are chosen to get plan contracts has to do with politics,"
said JoAnne Fischer of the Maternity Care Coalition in Philadelphia.
The value of collaboration. Before plan/community provider
contracts can develop into long-term relationships, more "dating"
must begin. One way to encourage such pairing might be to provide
evidence of the value of such collaborations. There are few, if any,
studies showing that collaborations have improved care to vulner-
able populations or resulted in more cost-effective care. What have
community-based providers done that has helped MCOs to meet
the special needs of Medicaid clients? How have the resources and
expertise of MCOs improved the care of Medicaid enrollees?
Solid, objective studies that answer these questions would do
much to move the collaboration agenda. Indeed, evidence of the
cost-effectiveness of individual community-based providers or par-
ticular outreach or educational methods could be the strongest sell-
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ing point of all. MCOs might not need any prodding to contract
with community-based providers if such proof were readily avail-
able. On the other hand, evidence of Medicaid managed care plans'
ability to improve access to care, which is also in short supply, might
convince community-based providers of the value of collaboration
with private plans.²⁰
Opportunities for discussion. As important as research and
public policy are to encouraging collaboration, it may be just as
important to provide opportunities for representatives of private
Medicaid managed care plans and community-based providers to
discuss openly the differences that divide the groups and to sort out
mutually acceptable roles, responsibilities, and mechanisms to en-
sure accountability for the care of vulnerable populations. Further
meetings, held at the community level, may go a long way in moving
these "arranged marriages" toward true compatibility.
VEN WITH SUCH STEPS, Medicaid managed care plans might
E
still come to the conclusion that they can serve the Medicaid
population without the help of community-based providers. If
that is the case, and federal or state policymakers still believe that
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partnerships between the two sets of organizations are important,
financial incentives or regulatory requirements may be needed to
ensure that such arrangements are established.
This paper was adapted from an issue brief prepared for a meeting sponsored by
the Health Resources and Services Administration (HRSA) of the U.S. Depart-
ment of Health and Human Services and the National Institute for Health Care
Management (NIHCM). The meeting, held 15 November 1996 in Washington,
D.C., brought together representatives of private Medicaid managed care plans
and community-based providers to discuss the issues that promote or hinder con-
tracts between them and to explore how collaboration can improve care for vul-
nerable populations. Any quotes in this paper that are not footnoted are drawn
from the transcript of that meeting. The author appreciates the support of the
NIHCM and HRSA for this paper and extends particular thanks to Kathleen
Eyre, Jeanne Ireland, Michael Sparer, Ed Neuschler, and Julia Tillman for their
review and comments.
NOTES
1. Health Care Financing Administration, "Medicaid Managed Care Enrollment
Report" (Washington: HCFA, Office of Managed Care, 30 June 1996).
2. American Association of Health Plans, 1995 HMO-PPO Trends Report (Washing-
ton: AAHP, 1995).
3. Other safety-net providers include public and private hospitals, including
academic health centers, that serve disproportionate numbers of Medicaid
and uninsured patients. This paper focuses on providers that provide only
outpatient care.
HEALTH AFFAIRS Volume 16, Number 4
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4. National Association of Community Health Centers, Access to Community Health
Care: A National and State Data Book (Washington: NACHC, 1996).
5. C. Orbovich, "Collaborative Strategies for Success in the Changing Medicaid
Market: The Perspectives of Community-Based Providers and Managed Care
Organizations" (Prepared for the Health Resources and Services Administra-
tion, U.S. Department of Health and Human Services, April 1996).
6. D. Lewis-Idema and M. Falik, Health Departments and Medicaid Agencies: Is the Cold
War Really Over? (Portland, Maine: National Academy for State Health Policy,
August 1990).
7. J. Schlitt et al., "School-Based Health Centers and Managed Care: Seven School-
Based Health Center Programs Negotiate a Difficult Fit" (Washington: Making
the Grade Program, The George Washington University, February 1996).
8. D.J. Zimmerman and C.J. Reif, "School-Based Health Centers and Managed
Care Health Plans: Partners in Care," Journal of Public Health Management Practice
(Winter 1995): 33-39.
9. Orbovich, "Collaborative Strategies," 21.
10. Lewin-VHI and MDS Associates, Community Health Centers' Performance under
Managed Care (Rockville, Md.: Bureau of Primary Health Care, Health Re-
sources and Services Administration, December 1994).
11. Bureau of Primary Health Care, HRSA, "Impact of Changes in the Nation's
Health Care System on Safety Net Providers: The Case of Health Centers"
(Memorandum from Marilyn Gaston, associate administrator, Bureau of Pri-
mary Health Care, HRSA, July 1996). According to the bureau's review of 150
contracts between health plans and federally qualified health centers, an esti-
mated 50 percent do not offer reasonable reimbursement rates (page 18).
12. Some of these lessons appear in the paper by Orbovich, "Collaborative Strate-
SAFETY NET
107
gies," 15, and were raised by participants in the meeting sponsored by HRSA
and AAHP, "Collaborative Strategies," 1-2 April 1996, in Washington, D.C.
13. Under Section 1915(b), states can ask to waive provider "freedom-of-choice"
rules to mandate enrollment of Medicaid beneficiaries into managed care ar-
rangements. Under Section 1115, states can ask to waive many rules to conduct
research and demonstration projects that advance the objectives of the Medic-
aid program. Typically, Section 1115 waivers have been granted to allow states
to implement mandatory managed care plans on a statewide basis and use the
savings to extend eligibility to additional groups of low-income persons.
14. M.S. Sparer, "Medicaid Managed Care and the Health Reform Debate: Lessons
from New York and California," Journal of Health Politics, Policy and Law (Fall
1996): 433-460.
15. "California Local Initiatives: Managing Healthcare in the Community," Access
(Newsletter of the California Association of Public Hospitals and Health Sys-
tems) (Summer 1996): 7.
16. T. Mark et al., Medicaid Managed Care Program Access Requirements, Final Report
(Report prepared for the Prospective Payment Assessment Commission, Pro-
ject HOPE, Center for Health Affairs, Bethesda, Maryland, March 1995).
17. Ibid., 3-2.
18. D.J. Lipson and N. Naierman, "Effects of Health System Changes on Safety-Net
Providers," Health Affairs (Summer 1996): 33-48.
19. M. Gold, M. Sparer, and K. Chu, "Medicaid Managed Care: Lessons from Five
States," Health Affairs (Fall 1996): 153-166.
20. Ibid., 164.
HEALTH AFFAIRS July/August 1997