This is the html version of the file http://www.ahcahp.org/publications/hurley03.pdf.   ------------------------------------------------------------------------------  Page 1  Medicaid-Focused Health Plans: A Community Health Conspiracy June 2003Robert E. Hurley, Ph.D. Department of Health Administration Virginia Commonwealth University Richmond, VA rhurley@hsc.vcu.edu 804-828-1891 Working Paper prepared for the Association for Health Center Affiliated Health Plans in conjunction with AHCAHP Conference in Washington DC, May 29, 2003. With funding from the Center for Health Care Strategies  --------------------------------------------------------------------------------  Page 2  Abstract Several changes occurring in the general managed care marketplace and in the Medicaid contracting environment are expanding the important role played by Medicaid-focused prepaid health plans. These plans embody both the features and the promise that the health maintenance organ­i­za­tion (HMO) once offered as a counter-cultural movement in the U.S. health care system. The transformations underway provide an opportunity to assess why the HMO remains a particularly valuable financing and delivery system in a resource constrained public program. The mutual dependence between these plans and Medicaid agencies underscores their need to maintain a sense of partnership during a period of significant fiscal challenge. 2  --------------------------------------------------------------------------------  Page 3  Medicaid Focused HMOs: A Community Health Conspiracy David Lawrence, the physician-CEO of Kaiser Permanente, once remarked in the late 1990s on how ironic it was that 25 years earlier health maintenance organ­i­za­tions (HMO) had been portrayed as a “communist conspiracy” and now they had become a “capitalist conspiracy.” Such a pointed comment underscores the degree to which the HMO has been perceived by many as a sinister threat for more than two generations (1). Why there has been such paranoia about this model and why its perpetrators have been so vilified, even as they have transitioned from members of a near religious movement to segments of a massive industry, begs for better understanding and appreciation. The answer appears to lie in the fact that prepaid, comprehensive benefit-based, organized delivery systems are indeed a frontal attack on the passive, reactive sickness care system that prevails in the U.S. They rep­re­sent a counter-cultural affront to the existing establishment in health care. Given this position, it seems appropriate that the HMO would find a reasonably hospitable haven in one of the sectors long relegated to the backwaters of the U.S. health care system, Medicaid. Within the Medicaid program, those HMOs that have made a major commitment to this population have been able to devise and maintain a far more disciplined and responsive product than could ever be acquired in a fragmented, fee-for-service environment. It can be contended that they have perpetrated what one might call a “community health conspiracy.” 3  --------------------------------------------------------------------------------  Page 4  Despite striking success in terms of enrollment growth and service delivery, Medicaid-focused plans are facing a new set of challenges in the health insurance and public finance realms that put their progress in jeopardy. The challenges reflect the high aspirations set by and for a counter-cultural movement and the vulnerability associated with serving a needy and often neglected membership. These challenges are initially described, particularly as they are revealed in the private health benefits sector, and in the current budgetary crisis found in the states. Next, the features of the HMO that illustrate its suitability and durability are detailed. Finally, a dis­cus­sion of the tactical responses needed to survive near term threats is presented. The Cresting of the Managed Care Wave A number of important trends in the managed care realm signal that the erstwhile purchaser revolution is fizzling and with it the period of cost control buyers enjoyed in the mid and late 1990s (2). The reasons for the decline are many and varied and mostly beyond the scope of this dis­cus­sion, but the consequences of the decline are powerful and pertinent. Most notably the decline reveals a significant retreat and retrenchment in the degree to which private purchasers can promise and deliver comprehensive benefits at a modest cost to their employees. Health plans serving private sector employers have responded by stepping back from their aggressive efforts to manage cost and care that brought down on them public opprobrium and disdain. It is difficult to criticize plans that have concluded that their survival is more dependent on satisfying disgruntled providers and consumers than accommodating equivocating purchasers. 4  --------------------------------------------------------------------------------  Page 5  The change in positioning by health plans is evident in the configuration of product offerings taken up by private employers (Figure 1). The HMO (and its closely associated point of service (POS) adaptation) saw its maximum enrollment peak in 1999. Since that time the principal growth has been in the more loosely managed product, the preferred provider organ­i­za­tion (PPO). By 2002 the PPO emerged as the modal private insurance product in the U.S. with 52% of all covered employees (3). This product has become essentially the platform of choice, both in the sense that it is the most often selected product and its most notable feature, its capacity to promote consumer choice better than more restrictive net­work products like the HMO (4). It also has a more flexible structure that is well-suited to employer preferences for self-funding, fewer covered benefits, and increased consumer cost sharing, all important accompanying developments in the private health benefits arena. 7348372923151498751 12 72 52 93 13 53 43 84 14 85 271 51 41 92 02 22 52 22 21 816192327273030282923260 %2 0 %4 0 %6 0 %8 0 %1 0 0 %1 9 8 81 9 9 41 9 9 61 9 9 82 0 0 02 0 0 2IndemnityPPOPOSHMOPercent of all covered employees.National employee enrollment by type of plan*Source: J. Gabel, et al Employer Health Benefits. 2002 Annual Survey. KFF/HRET, 2002Figure 15  --------------------------------------------------------------------------------  Page 6  Paralleling the shift to more minimally managed care has been a dramatic upturn in health care premiums in recent years (Figure 2), which has wiped away the gains of the previous decade. The return to mid-teen rates of increases is a daunting and disappointing development in its own right, but for private purchasers who once hitched their wagons to the managed care star it is deeply disturbing. The trend has led many purchasers to question whether health plans have any “tools remaining in their toolbox”(5). Most notably, plans seem to have lost the ability to curb provider demands for increased payments to offset rising input costs and counteract declines in public sector payments. Purchasers have come to see many plans as merely messengers, simply passing along provider calls for increased com­pen­sa­tion and further confirming doubts Increases in Health Insurance Premiums Compared to Other Indicators, 1988-2002024681 01 21 41 61 82 01 9888 99 09 19 29 39 49 49 69 79 89 9012 002HI P remiumsWorkers EarningsOverall Inflation18%12.7%.8%Source: J. Gabel, et al Employer Health Benefits. 2002 Annual Survey. KFF, 2002Figure 26  --------------------------------------------------------------------------------  Page 7  that the pains of tightly managed care could ever justify the presumed gains. Loss of faith in tightly managed care has led purchasers to conclude that perhaps minimalist models like PPOs provide them with all the value they can expect from a third party administrator. HMOs seem not to have been able to parlay prepayment and risk pooling to any particular price advantage, so self-funding grows in appeal and PPOs can deliver a turnkey provider net­work. Selectivity in provider networks has not yielded bankable gains, so a broad net­work with limited man­age­ment to respond to consumer preferences for choice can suffice. Benefit designs are unregulated for self-funded employers and PPOs fall largely below regulatory radar, so benefit buy-down is facilitated as employers try to align what they offer with what they can afford. This is far more difficult with tightly regulated HMO designs. The simple coinsurance arrangements found in PPOs are well-suited to sensitize employees to the relative cost of care and alert them to the value of using contracted providers. In addition, cost sharing provisions in the PPO in general can be easily raised to offload an increasing portion of rising costs directly to consumers (6). Who Will Pay? The diminished impact of managed care and the conversion to products with lower aspirations to achieve cost control raise new questions about how to finance the U.S. health care system to maintain it and its participants in the style to which they have become accustomed. Many proponents of increased cost participation for consumers believe that the only recourse available is to seek greater contribution from consumers whose insatiable appetite for care has grown in direct proportion to the expansion of 7  --------------------------------------------------------------------------------  Page 8  benefit coverage that accompanied the growth of the HMO in the 1990s. Some suggest the ability to finance expanded coverage came through the discounts extracted from providers, the very discounts that now are no longer attainable or sustainable. Thus, the inevitable trade-off facing consumers is to contribute more or surrender some of the benefit expansion they have acquired (7). The pharmaceutical benefits area is one in which this transition is already most apparent. Coverage expansion was dramatic in the 1990s with out-of-pocket payments for pharmaceuticals dropping from 59 % of total payments to 32 % in 10 years (8). One consequence of this shift was an extraordinary increase in pharmacy expenditures that reached 20 % per year in 2000 (9). In response, purchasers and plans introduced a series of cost sharing strategies that subjected consumers to graduated co-payments based on the availability of substitutes and the ability of plans (or pharmacy benefits managers) to negotiate preferred prices with drug companies. Multi-tiered benefit designs became an industry standard virtually overnight and persuaded many that stimulating consumer cost consciousness could alter behavior and save money, at least for plans and purchasers. More ambitious efforts to shift cost and promote consumer re­spon­si­bil­ity are embodied in the rise of so-called “consumer driven/directed health products” (10). These new models combine components of 1) giving employees more control over benefit dollars and designs; 2) limiting employer re­spon­si­bil­ity and exposure; and 3) promoting price competition among providers to instill stronger market forces into the purchase and consumption of health benefits. The fact that some of the major purveyors of these 8  --------------------------------------------------------------------------------  Page 9  products have come from outside of the managed care and health insurance industries implies that at least some purchasers are looking for unconventional solutions. Furthermore, the fact that many conventional insurers are now adding these options to their product portfolios may be indicative of their growing respectability and potential long term appeal (11). In many respects, the emergence of consumer-directed products confirms a loss of faith that managed care can recover the luster it has lost as a cost containment strategy. Whether the new genre of products can do better is far from certain, and low current take-up rates defy accurately gauging what their long-term impact will be. They almost certainly will attract healthy indi­vid­uals willing to cash out a portion of their current premiums to a medical spending or reimbursement account and settle for a high deductible policy. How much discretionary care will be forgone or how much price-based shopping holders of such accounts will engage in can only be speculated about at this time. The degree to which needed care may be delayed or undelivered, with resulting higher costs incurred later, is equally uncertain. Where the model seems to be more seriously suspect is on the issues of equity and practicality. Insulating consumers from most health care costs through comprehensive coverage policies has the effect of neutralizing the impact of income on much of the consumption of health care. A model that seeks to provoke increased cost-conscious demand for care invariably will have differential effects across income groups, some of which may find they are trading off health benefits for other necessities of life. Such 9  --------------------------------------------------------------------------------  Page 10  tradeoffs can be softened and contained though design features like subsidies, but they cannot fully counteract the adverse effects on low-income persons that are unavoidable in any kind of increased cost sharing. The other point of particular vulnerability for these models lies in the dearth of meaningful information to support cost and outcome comparison and the continued reluctance of care providers to share credible information in these areas. Proponents suggest that only when consumers are positioned to make price and value comparisons will meaningful data to support these decisions become available. Likewise, providers will then know that they have to be more forthcoming and accommodating because failure to do so will have adverse consequences for them. Even if one is prepared to accept this scenario as plausible, the research to date on consumer use of information like plan and provider report cards is hardly reason for optimism. It is easy to be skeptical, if not dismissive, about the promise of consumer-directed health products. But it is sobering to recognize that with the steep rise in consumer cost-sharing and concerted efforts by employers to promote acceptance of less-rich benefit designs, a de facto “inching toward defined contribution” is already afoot for many privately insured persons. Ultimately, consumers’ demands for more control and direction may follow when their economic stake in their health care has been sharply increased. 10  --------------------------------------------------------------------------------  Page 11  Availability and take-up of these new products in the public sector is far more problematic. In that sector, owing to the wonders of cost-shifting, communities have been able to sustain coverage for persons unable to pay for additional out of pocket costs. As a default policy option to finance uncompensated care, cost shifting has proven to be a durable strategy particularly in communities where private health care providers provide the bulk of uncompensated or subsidized care. But cost shifting in the hospital sector has been in decline as private payers turned to managed care organ­i­za­tions to impose more control on payment levels to hospitals,and the facilities them­selves reduced their operating costs to become more efficient and maintain their viability (Figure 3). Hospital Payments as a Percentage of Cost by Payer—1990-20006 0 .0 0 %7 0 .0 0 %8 0 .0 0 %9 0 .0 0 %1 0 0 .0 0 %1 1 0 .0 0 %1 2 0 .0 0 %1 3 0 .0 0 %1 4 0 .0 0 %1 9 9 01 9 9 11 9 9 21 9 9 31 9 9 41 9 9 51 9 9 61 9 9 71 9 9 81 9 9 92 0 0 0P riv a te P a y e r sM e d ic a reM e d ic a id126.8089.2079.70112.50100.2096.10Source: Medicare Payment Advisory Commission, Report to Congress, March 2002Figure 311  --------------------------------------------------------------------------------  Page 12  It is this improved efficiency that has led to payment rates from Medicare and Medicaid that more closely approach costs. The net effect of this pattern is that hospitals have fewer resources available to subsidize uncompensated care, highlighting the need to ensure that the maximum number of uninsured are transitioned from uncovered status to some category of coverage. Being unlikely candidates for participation in consumer-directed health products, most of these indi­vid­uals will have to rely on traditional managed care models, like HMOs, to gain access to necessary coverage. Where Will the Money Come From? The final challenge of note that is threatening managed care, particularly in Medicaid, is the historic decline in revenues experienced by states in the current recession and the post-9/11 environment (Figure 4). The plunging tax collections of the past 2 plus years have fallen like a dagger into the hearts of states that were deeply in the midst of equally historic increases in coverage associated with State Children Health Insurance Program (SCHIP) and various state-initiated expansions of the mid and late 1990s. Insofar as most states have relied on managed care arrangements and prepaid models in particular because of their cost predictability as the financing and delivery platforms for these expansion, lessening of support for these models could put eligibility expansions in jeopardy—and they have (12). 12  --------------------------------------------------------------------------------  Page 13  Change in Quarterly State Tax Revenue, FY 1998-200271078556710117453-3-3-8-10-5051015Q1-98 Q2 -98 Q3- 98 Q4-9 8 Q1 -99 Q2- 99 Q3- 99 Q4-9 9 Q1 -00 Q2- 00 Q3- 00 Q4-00 Q1 -01 Q2- 01 Q3-0 1 Q4 -01 Q1- 0219981999 2000 2001 2Percentage ChangeSource: NW. Jenny , State Revenue Report, no 49 (Rockefeller Institute of Government), September , 2002Figure 4Prepayment particularly has come under siege as states scramble to find revenues sufficient to meet the expenses of participating HMOs or, at a minimum, avoid having to reduce or rollback capitation rates. Contrary to trends in the commercial sector, buying-down the basic benefit package is virtually impossible in Medicaid (and infeasible in many SCHIP programs). Nor can Medicaid-participating plans turn to substantial cost sharing with beneficiaries—most of whom are, by definition, financially distressed to begin with. States can, and may yet, turn or return, in effect, to self-funding as their private sector counterparts are doing, by converting full risk arrangements to partial risk or even purely administrative services only (ASO) arrangements with existing health plans. What the consequences of such shifts may be for care and cost man­age­ment are unclear at this time, but absent the possibility of benefit reductions or increased cost 13  --------------------------------------------------------------------------------  Page 14  sharing found in private ASO arrangements, it is difficult to be sanguine about the implications of such a conversion. The “x-factor” in terms of state response to the current fiscal crisis is what relief will be forthcoming from the federal coffers. While persistently refusing to consider increasing the state matching rate for Medicaid as many governors requested, the Administration offered the states increased flexibility to trim benefits for some beneficiaries to get some limited financial breathing room. Convinced that this response was hardly commensurate with the magnitude of the crisis, the states took their case to Congress and ultimately prevailed on them to obtain $10 billion in assistance for Medicaid (ingeniously funded through a convoluted process of getting an offset again the President’s tax credit proposal). How well this supplement softens the blow that prepaid health plans might have incurred remains to be seen. Crisis and the HMO Response The series of challenges to the traditional HMO model and the bleak budget picture of state governments raise the basic question: Can Medicaid agencies continue to depend on HMOs to meet their needs and desires for care man­age­ment and cost control for their beneficiaries? There is a well-earned crisis in the managed care world among care-givers, purchasers, and consumers and it is worth reassessing if the model is still viable. Managed care plan participation has waned in Medicaid in recent years but few states have found it impossible to sustain prepaid programs thus far (13). In large measure this 14  --------------------------------------------------------------------------------  Page 15  is because they have turn to and been well-served by a cadre of Medicaid-focused plans that are growing in size and sophistication and that have more than offset the shrinking participation among multi-product, commercially focused managed care firms. Not only are these plans succeeding individually; but, as a group, they are keeping alive the flickering flame of the prepaid health plan movement. It is no accident that this is occurring in Medicaid, because it is in this program where limited resources argue most strongly for a model of financing and delivery that champions rational resource allocation. While many features of the HMO have been modified in the the quarter century since Luft defined its essential elements, the core components remain in most Medicaid-focused HMOs largely intact (14). It is in the commercial world where the retreat from the traditional HMO has been most notable, and rather than representing a victory, as HMO-critics would contend, this has been a series of losses. We have witnessed a declining reliance on risk pooling and the use of community rating for rate setting. Comprehensive benefits have proven difficult to maintain and reliance on full prepayment has been eroded. With the loss of these features, the basic commitment to prevention in health maintenance organ­i­za­tion has become difficult to sustain. The capacity of HMOs to promote care coordination and accountability has been undermined, as plans have dropped restricted networks, primary care case man­age­ment, and pre-service authorization and concurrent review. Taken together, weakening of the basic foundation has meant the surviving models of managed care are ill-designed to meet the 15  --------------------------------------------------------------------------------  Page 16  needs of those purchasers who fully acknowledge that they face real financial constraints, such as state Medicaid agencies. Risk Pooling and Prepayment. Among the most troubling aspects of the current shift toward increased use of cost sharing is that it places the greatest burden on the highest users of care. In principle, increasing a sense of re­spon­si­bil­ity for care consumption has many laudable features, but given that the burden of illness is not randomly distributed and that ill health is positively correlated with diminished income, linking individual contributions to expected service use has real limits. It also is a model that is fraught with the danger of undermining the principle of community-based risk-pooling, which is at the heart of health insurance. Consumer driven health products rep­re­sent a direct assault on this idea, as they almost certainly will lure the young and healthy from comprehensive insurance pools. This scenario would leave the less healthy in pools that could soon be caught up in death spirals as premiums rise sharply, leaving only the sickest willing to buy ever-more-costly insurance. From the standpoint of provision of care, a flight from prepayment, triggered in part by the backlash against capitation, has meant a significant setback for promoting innovation in care delivery. Prepayment represents a financial constraint that should produce an imperative to find more efficient ways to deliver services to achieve equal or superior outcomes. Taken a step further, capitation payment per se can be viewed as a liberatingdevice that allows for the capitation holder to find creative means to render care that can be patient/member-centered. This upside feature of capitation has been badly overlooked in the backlash against the under-service threats associated with capitated 16  --------------------------------------------------------------------------------  Page 17  com­pen­sa­tion. But the liberation opportunities can be and are realized by those organ­i­za­tions that are wisely structured and cleverly operated to avail them­selves of capitation’s virtues. Comprehensive Benefits and Prevention. The unbundling of comprehensive benefit packages and the potential for purchasers and/or consumers to buy-down their own packages have appeal as short term measures to find some financial relief. The zest to pursue these options is a strong motivator for many purchasers to drop HMO offerings whose structures, benefits, and practices have been overly pres­crib­ed by legislators and regulators. But increased cost-sharing or “skinnyed-down” benefit packages may lower prices while driving up, or at least displacing, costs. The experience of Medicare’s omission of an outpatient prescription drug benefit is telling in this regard, as the burden on beneficiaries in terms of costs and foregone care and medi­ca­tions is substantial. Nearly 90 percent of all of beneficiaries obtain some form of what is called a “supplemental” policy, but really is a “compensatory” policy to make Medicare coverage adequate. For low-income persons, such as those in Medicaid, a benefit package without pharmaceutical coverage (ostensibly an optional service in Medicaid) seems inconceivable and dangerously incomplete. The prevention imperative in health care is both as compelling and under appreciated as the overall public health function in America. It is the classic situation where there is an incongruity between the economic (and social mission) case and the business case for investment (15). But the fault lies both in our reliance on employer-sponsored, enrollment-based insurance approach and in the sickness-oriented health care system that 17  --------------------------------------------------------------------------------  Page 18  it has spawned and sponsored. A sickness system will always (intentionally or unintentionally) neglect prevention and its sponsors will find it nearly impossible to find ways to make investments in wellness that provide a reasonable and reliable rate of return. The HMO, notwithstanding its own inherent limitations as a commercial enterprise, represents the best model yet developed to try create a reasonable business case for investing in maintaining the wellness of an enrolled population. It is in the most mature and stable of HMOs, such as Kaiser Permanente with multi-generational memberships, that one can see most clearly the potential that cradle-to-grave enrollment has for altering the conventional logic and calculus of preventive service investment. Care Coordination and Accountability. While HMOs enjoyed the dubious reputation of drawing “favorable selection” (allegedly intentionally) for many years, there now seems a new recognition that they face greater risk of drawing “adverse selection” because of their capacity to provide comprehensive benefits and care coordination to persons with chronic illness. Increased attention to the needs of persons with chronic illness and the emergence of consensus models of organized care delivery for these indi­vid­uals has underscored the need for more and better systems of care (16). Enrolled populations, engaged networks of providers, available auxiliary personnel, strong information infrastructure, and established regimens of patient monitoring are far more likely to be found and functional in HMOs that in the notoriously unmanaged fee-for-service world of PPO products. HMOs also offered a credible basis for quality improvement that far exceeds anything that can be found in the fee-for-service world, particularly in the Medicaid program 18  --------------------------------------------------------------------------------  Page 19  where fee-for-service care has often been marginally delivered on an episodic basis at less-than-desirable sites of care. Granted that intermittent eligibility in Medicaid presents huge problems in measuring and monitoring accountability, as Medicaid HEDIS indicators attest, but one only has to recall how very, very little quality monitoring in Medicaid pre-dated the arrival of managed care in Medicaid to appreciate what a great leap forward this has meant. While other models of managed care like primary care case man­age­ment can deliver some of the elements of systematic quality improvement, none of these programs has in place the range of systems and processes that a well-established, strongly-committed HMO can mount. Financial Constraints. The degree to which HMOs can provide Medicaid agencies with enhanced accountability illustrates the final point why the HMO, and in particular the Medicaid-focused HMO, has found an enduring place in Medicaid. The history of Medicaid has clearly been marked by a consuming concern with cost containment. But this concern has also been informed by recognizing that where resources are limited, as they invariably are in Medicaid, program managers must husband these resources carefully and spend them wisely. HMO contracting provides a unique opportunity to achieve this by creating the opportunity to carefully measure both the numerator (outcomes) and denominator (price) to compute the value ratio for its spending. Not only can it do this at one point in time, but, more importantly, it allows for promoting and rewarding improvement over time. Certainly not all Medicaid programs have done this, but for those that have, the evidence has been strong that purchasing care through HMOs represents a sound and supportable use of precious resources. 19  --------------------------------------------------------------------------------  Page 20  The Medicaid Focused HMO—Enduring and Prevailing More than half of all Medicaid beneficiaries enrolled in HMOs are enrolled in plans that focus their efforts on serving Medicaid and SCHIP members (17). This trend is certain to continue, as most commercially-oriented firms de-emphasize the HMO product and resort to a variety of survival strategies that are increasingly unresponsive to Medicaid’s needs. At the same time, the withdrawal of these firms has contributed to growth in the size of Medicaid-focused plans that has led to improved stability, and in many cases, enhanced financial performance. Moreover, Medicaid-focused plans are so committed to this line of business that they have a vested interested in finding accommodation with state Medicaid agencies now in the throes of budgetary crisis. Unlike multi-product firms that left Medicare when a tight ceiling was clamped on rate increases by the Balance Budget Act of 1997, these single product firms have no recourse but to make Medicaid managed care work, or go out of business. It will be interesting to track how participation of Medicaid-focused plans may vary by sponsorship as financial stress and strain grows. The growth of investor owned plans like Amerigroup, Centene, and Molina and repositioning by companies like United Healthcare Group and Wellpoint to expand Medicaid focused subsidiaries has bolstered the number of plans with which many states can contract at a time when commercially-focused plans have given up on the Medicaid niche market. Whether state budget problems create problems for these firms or unsettle their investors remains to be seen. By the same token, provider-sponsored Medicaid-focused plans also bear close watching as provider owners may be forced to choose between continuing to sponsor prepaid 20  --------------------------------------------------------------------------------  Page 21  health plans or retrench to provider-only status and lobby for preserving favorable payment rates as hospitals or community health centers. There is currently little evidence to suggest that sponsorship of Medicaid-focused plans is associated with important differences in financial and non-financial performance. What seems clear is that irrespective of sponsorship, these plans have succeeded in devising models for collaborative commitment maximizing care for persons in need, in spite of the limited resources available to them. The plans also seem to have had somewhat more success in developing collaborative relationships between health system developers and health service providers than their commercially oriented counterparts. In many notable instances, they have succeeded in perpetrating and maintaining a community health conspiracy. How well these plans will survive the state budget catastrophe that is sweeping the nation like a tsunami—a tidal wide—threatening everything in its path remains to be seen. There is little doubt at this point that despite the best instincts of state Medicaid officials, rational and sensible purchasing strategies that can get good value for beneficiaries are at substantial risk. In those cases where states do not know or believe that prepaid managed care is providing superior value, HMO programs are clearly at risk of being relinquished or lost. What can plans do to improve their survival prospects at this point? A strong and visible commitment to the principles of prepaid health plans will be important. So too 21  --------------------------------------------------------------------------------  Page 22  will be the financial wherewithal to endure a period where rates do not keep pace with medical expenses and to still maintain essential elements of a managed care enterprise. One of these elements will be retention of a provider net­work whose resilience will be sorely tested when plans must explain to providers why payments to them will not keep up with their expenses during this difficult period. Plans will also require reasonable accommodations from state Medicaid agencies to relax contractual demands or reduce the scope of risk if payment adjustments cannot be made to meet expenses in the short term. This will be a clear test of the degree to which “partnership pays” if both parties remain committed to preservation of a proven managed care program (18). It is here where evidence that plans have made a difference in the lives of their members will be most crucial and could hold the key to program and plan survival. Conclusion This time of crisis for Medicaid managed care also serves to remind us both why Medicaid turned to managed care in the first place and why this relationship has been so strong and lasting. When and where we understand that health care resources are not unlimited and must be expended with deliberateness and discretion, we will find that the HMO model can and will meet our needs. It is for that reason that we can believe with some confidence that prepaid health plans in Medicaid will not only endure but also prevail. 22  --------------------------------------------------------------------------------  Page 23  23Sources 1. T. Mayer and G. Mayer, “HMOs: Origins and Developments,” New England Journal of Medicine, 312(9): 390-394, 1985. 2. D. Draper et al. “The Changing Face of Managed Care.” Health Affairs 21(1) : 11-23 (Jan/Feb 2002) 3. J. Gabel, et al. Employer Health Benefits. 2002 Annual Survey. Menlo Park, CA: The Henry J. Kaiser Family Foundation and the Health Research and Education Trust, 2002. 4. C. Lesser and P. Ginsburg, Health Care Cost and Access: Problems Intensify, Issue Brief No. 63. Washington, DC: Center for Studying Health System Change, May 2003. 5. G. May et al, “An Empty Toolbox? Changes in Health Plans’ Approaches for Managing Costs and Care,” Health Services Research, 31(1, Part II): 375-394 (February 2003). 6. Lesser and Ginsburg, Health Care Cost and Access. . . 7. L. Benko, “Loosening Their Grip: As HMOs Popularity Continues to Erode, More Plans Turn to Less Restrictive Products. But With Costs Rising, What’s Next?” Modern Healthcare 32, no 15: 30-34 (2002). 8. Kaiser Family Foundation. Prescription Drug Trends Fact Sheet, http://www.kff.org/content/2003/305702/3057_02_033103.pdf (March 2003). 9. Mays, G., R. Hurley, and J. Grossman. “Consumers Face Higher Costs as Health Plans Seek to Control Drug Spending.” Issue Brief No. 45. Washington, DC: Center for Studying Health System Change, November 2001. 10. K. Martin, Shifting Responsibilities: Models of Defined Contribution, AcademyHealth, http://hcfo.net/pdf/definedcontribution.pdf. (February 2002). 11. J. Gabel et al, “Consumer-Driven Health Plans: Are the More than Talk Now,” http://www.healthaffairs.org/WebExclusives/Gabel_Web_Excl_112002.htm(November 2002). 12. R. Hurley and S. Somers. “Medicaid and Managed Care: A Lasting Relationship?” Health Affairs 22(1):77-88 (Jan/Feb 2003). 13. S. Felt-Lisk et al, Trends in Health Plans Serving Medicaid–2000 Data Update. Washington: Kaiser Commission on Medicaid and the Uninsured (November 2001). T. Coughlin et al, “Commercial Health Plan Participation in Medicaid Managed Care: An Examination of Six Markets.” Inquiry. 38(1):22-34 (2001). 14. H. Luft, HMOs: Dimensions of Performance, New York: John Wiley, 1981. 15. S. Leatherman et al, “Making the Business Case for Quality,” Health Affairs, 22(2):17-39 (March/April 2003). 16. E. Wagner et al, “Improving Chronic Illness Care: Translating Evidence into Action,” Health Affairs, 20(6):64-78 (Nov/Dec 2001). 17. R. Hurley and D. Draper, “Medicaid Confronts a Changing Managed Care Marketplace,” Health Care Financing Review, 24(1): 11-25 (Fall 2002). 18. R. Hurley and M. McCue, Partnership Pays: Making Medicaid Managed Care Work in a Turbulent Environment. Princeton, NJ: Center for Health Care Strategies (February 2000). 

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