Community Health Centers: Challenges in Transitioning to Prepaid Managed
Care (Letter Report, 05/04/95, GAO/HEHS-95-138).

GAO reviewed the effects of managed health care on community health
centers, focusing on: (1) whether centers participating in prepaid
managed care have been able to provide medical services without
jeopardizing their financial position; (2) lessons learned from centers'
experiences in prepaid managed care; and (3) whether the Bureau of
Primary Health Care (BPHC) prepares community health centers to operate
under prepaid managed care systems.

GAO found that by 1993: (1) almost 500,000 community health center
patients were covered by prepaid managed care arrangements; (2) the 10
centers surveyed were able to continue to provide full services to their
vulnerable clients in part due to other revenue sources; (3) all 10
centers increased their patient load and spending for a variety of
services, while 7 centers also increased their spending for
uncompensated care; (4) all 10 centers improved their financial
condition due to increased revenues from a variety of sources; and (5) 3
centers had losses of up to $124,000, while 6 centers had excess
revenues of up to $100,000 from prepaid managed care. GAO also found
that: (1) the centers may be financially vulnerable if they depend on
Medicaid prepaid managed care for a sizeable portion of their revenues,
have inadequate capitation rates, and have financial responsibility for
other than primary care services or rely on other federal and state
funding sources; (2) lessons learned from centers' experiences with
prepaid managed care include the likely loss of patients if the centers
fail to participate, low capitation rates, assumption of too much
financial risk, and the lack of managed care skills; and (3) to
encourage centers' participation in prepaid managed care, BPHC has
implemented an initiative to fund centers' efforts to develop delivery
networks with other health providers for managed care operations.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-95-138
     TITLE:  Community Health Centers: Challenges in Transitioning to 
             Prepaid Managed Care
      DATE:  05/04/95
   SUBJECT:  Health care services
             Disadvantaged persons
             Medicaid programs
             Community health services
             Health centers
             Health care cost control
             Medical economic analysis
             Economic stabilization
IDENTIFIER:  HHS Community and Migrant Health Centers Program
             HHS Integrated Service Network Development Initiative
             TennCare
             Arizona
             Florida
             Massachusetts
             Pennsylvania
             Arizona Medicaid Managed Care Program
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Labor and Human Resources, U.S. 
Senate

May 1995

COMMUNITY HEALTH CENTERS -
CHALLENGES IN TRANSITIONING TO
PREPAID MANAGED CARE

GAO/HEHS-95-138

Medicaid Prepaid Managed Care


Abbreviations
=============================================================== ABBREV

  AIDS - acquired immunodeficiency syndrome
  BPHC - Bureau of Primary Health Care
  EOFHC - Economic Opportunity Family Health Center
  GPHA - Greater Philadelphia Health Action, Inc. 
  HCFA - Health Care Financing Administration
  HHS - Department of Health and Human Services
  HIV - human immunodeficiency virus
  HRSA - Health Resources and Services Administration
  ISN - Integrated Service Network
  LCHC - Lynn Community Health Center
  MPHC - Mountain Park Health Center
  OEO - Office of Economic Opportunity
  OBRA89 - Omnibus Budget and Reconciliation Act of 1989
  PCCM - primary care case management
  PHS - Public Health Service
  RoxComp - Roxbury Comprehensive Community Health Center

Letter
=============================================================== LETTER


B-260900

May 4, 1995

The Honorable Nancy L.  Kassebaum
Chairman, Committee on Labor
 and Human Resources
United States Senate

Dear Madam Chairman: 

The federal Community and Migrant Health Center program supports
access to care in medically underserved areas and serves over 7
million people.\1 In fiscal year 1994, the Congress authorized $663
million for this program to support about 627 grantee health centers. 
In addition to medical services, these centers provide other services
that facilitate health care.  These enabling services may include
transportation, health education, counseling, or translation services
and linkages with other social services. 

Community health centers face a changing health care environment. 
One of the most significant changes affecting these centers has been
the move by states to prepaid managed care delivery systems.  States
are using this type of arrangement to increase access to and control
the costs of their Medicaid programs, which are a major source of
funding for most health centers.  Under prepaid managed care, health
care organizations are paid a per capita amount each month to provide
for contracted medical services. 

In 1989, the Congress mandated that state Medicaid programs reimburse
health centers for the cost of services that the centers provide to
their beneficiaries.  The more recent change from cost-based
reimbursement to a monthly per capita amount for health centers
participating in prepaid managed care has raised concerns about the
ability of these centers to continue to provide their communities
with both medical and enabling services.\2 Mindful of these concerns,
we focused on the following questions: 

  Have centers in prepaid managed care been able to continue
     providing the medical and enabling services needed in their
     communities without threatening their financial position? 

  What lessons can be learned from health center experiences in
     prepaid managed care? 

  How does the Bureau of Primary Health Care (BPHC) help centers
     prepare for operating under prepaid managed care systems? 

In conducting this work, we performed detailed reviews of 10 health
centers in four states--Arizona, Florida, Massachusetts, and
Pennsylvania--that have had Medicaid prepaid managed care programs
since the mid-1980s.\3 (See app.  I for descriptive information on
the 10 centers.) At each health center, we collected program and
financial data for fiscal years 1989 through 1993.  We also
interviewed health center and state Medicaid program officials.  In
addition, we visited state Medicaid offices and health centers in
Tennessee and Washington to learn about recent changes in their
Medicaid programs and the responses of health centers to these
changes.  We also interviewed BPHC officials with responsibility for
providing guidance and overseeing the Community and Migrant Health
Center Program.  Appendix II contains a more detailed discussion of
our methodology.  Our work was performed from January 1994 to March
1995 in accordance with generally accepted government auditing
standards. 


--------------------
\1 Medically underserved areas are designated by the Secretary of
Health and Human Services (HHS) based on the ratio of primary care
physicians to population, the percentage of the population below the
federal poverty level, the percentage of the population 65 years old
and older, and an area's infant mortality rate. 

\2 Some health centers are concerned that reimbursement under a
discounted fee schedule will affect their ability to provide services
to their communities. 

\3 Nine of the centers receive community health center grants and one
receives both community and migrant health center grants. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In response to the changing health care environment, an increasing
number of community health centers are participating in Medicaid
prepaid managed care arrangements.  While centers continue to serve
vulnerable populations, prepaid managed care exposes the centers to
significant financial risks. 

By 1993, almost one-half million community health center patients
were covered by prepaid Medicaid managed care arrangements, an
increase of 55 percent from 1991.  Capitation rates for primary care
services provided to patients at the 10 centers we visited ranged
from $12 to $38 per patient per month.  This variation in capitation
rates is related to differences in the services covered under health
plan contracts at each center. 

Despite initial concerns that capitation and other features of
managed care would diminish health centers' ability to provide
services to vulnerable populations, this was not the case at the 10
centers we reviewed.  The centers were able to continue to provide
such services in part because they receive other revenues to support
them.  All 10 health centers were serving more patients and had
increased the amount spent on maintaining or expanding a variety of
enabling services.  Seven centers also increased the amount spent on
covering the uncompensated care of low-income patients. 

While maintaining or expanding their medical and enabling services,
all 10 health centers also improved their overall financial positions
to some degree.  Improvement was related to increases in revenues
that were greater than the centers' overall expenses.  Revenues came
from a variety of funding sources such as Ryan White Comprehensive
AIDS Resource Emergency Care Act grants and state grants.  Although
prepaid managed care revenues are growing as a percentage of total
health center revenues, they did not always exceed expenses for
prepaid enrollees.  In fact, in 1993, three centers reported losses
of up to $124,000 from prepaid managed care.  Six centers fared
better, reporting excess revenues up to $100,000 from prepaid managed
care. 

Even with improved overall financial positions, as indicated by
increased year-end fund balances, some health centers may be
vulnerable to financial difficulties.  None of the 10 centers met
BPHC's suggested benchmark of 60 days of cash on hand to cover
operating expenses--they ranged from less than 1 day to 31 days. 
Health centers may be especially vulnerable financially if they have
a sizable portion of total revenues from Medicaid prepaid managed
care, have capitation rates that do not fully cover the cost of
services, have assumed financial responsibility for services other
than primary care, or have relied heavily on other federal and state
funds to conduct center activities. 

While participation in managed care does not currently appear to have
diminished centers' ability to fulfill their mission, some of these
centers encountered serious difficulties when they initially entered
into managed care arrangements.  These include low capitation rates;
assumption of too much financial risk; and a lack of managed care
knowledge, expertise, and information.  In the case of an Arizona
health center, problems in all these areas led to insolvency and
forced the center to cut back on its medical and enabling services. 

Consistent with its role of providing policy guidance and technical
assistance to health centers, the Department of Health and Human
Services' (HHS) BPHC is encouraging centers to prepare for prepaid
managed care and offers training, consultation, and contract-review
services to grantees.  Some of these services are offered in
conjunction with the centers' national association.  BPHC also has
begun an Integrated Service Network (ISN) Development Initiative to
fund centers' efforts to develop delivery networks with other health
care providers for managed care operations. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Grants to states to develop community health centers were first
authorized by the federal government in the mid-1960s.  By the early
1970s, about 100 health centers had been established by the Office of
Economic Opportunity (OEO).  When OEO was phased out in the early
1970s, the centers supported under this authority were transferred to
the Public Health Service (PHS).  Since 1989, close to $3 billion has
been awarded in project grants to health centers.  Project grants are
authorized under Sections 329 and 330 of the Public Health Service
Act and are to be used by health centers to provide primary health
care and related services to medically underserved communities. 

BPHC sets policy and administers the Community and Migrant Health
Center program.  BPHC is part of the Health Resources and Services
Administration (HRSA) under PHS.  Ten regional PHS offices assist
BPHC with managing the program.  The regional offices are primarily
responsible for monitoring the use of program funds by grantees. 


      HEALTH CENTERS PROVIDE
      MEDICAL AND ENABLING
      SERVICES TO UNDERSERVED
      COMMUNITIES
---------------------------------------------------------- Letter :2.1

In 1994, the Community and Migrant Health Center program offered
comprehensive primary health care services to about 7.1 million
people through 1,615 health care delivery sites in medically
underserved areas.  Health centers are expected to target their
services to those with the greatest risk of going without needed
medical care.  About 44 percent of health center patients are
children under 19 years old and 30 percent are women in their
childbearing years.  About 60 percent of health center patients live
in economically depressed areas and nearly 63 percent have incomes
below the federal poverty level. 

A central feature of health centers is their governance structure. 
Local community boards govern health centers and are expected to
tailor health center programs to the community they serve.  In
addition to comprehensive primary care services and case management,
centers are expected to offer enabling services.\4 These services are
determined from assessments of community needs and are intended to
help individuals overcome barriers that could prevent them from
getting needed services. 


--------------------
\4 Case management services (including counseling, referral and
follow-up services) are designed to assist health center patients in
establishing eligibility for and gaining access to federal, state,
and local programs that pay or provide for medical, social,
educational, or related services. 


      HEALTH CENTERS RECEIVE
      FUNDING FROM MULTIPLE
      SOURCES
---------------------------------------------------------- Letter :2.2

Health centers are supported by various funding streams.  Community
health center project grants and Medicaid provide the two largest
components of health center revenues, respectively, 35 and 34 percent
in 1994.  Health centers may also receive other federal, state, and
local grants to support their activities. 

While health centers are required to offer services to all
individuals regardless of their ability to pay, centers must seek
reimbursement from those who can pay as well as from third-party
payers such Medicaid, Medicare, and private insurance.  Patient fees
are set using a sliding fee schedule that is tied to federal poverty
levels.  Patients with incomes below a certain percentage of the
federal poverty level receive free care or may pay some portion--a
discounted fee--while those in the highest income levels pay fees
that cover the full service charge.  The difference between service
charges and the sliding fees collected is a measure of the amount of
low-income care subsidized by the center. 


      RECENT CHANGES IN FINANCING
      AND HEALTH SERVICE DELIVERY
      AFFECT HEALTH CENTERS
---------------------------------------------------------- Letter :2.3

Two major developments in recent years have affected the financial
status and, therefore, the viability of health centers.  The first is
the authorization of a cost-based reimbursement system for health
centers and the second is centers' participation in prepaid managed
care.  In the late 1980s, the Congress recognized that neither
Medicare nor Medicaid paid the full cost for services provided to
program beneficiaries at community health centers.  This was due to
low reimbursement rates and because some enabling services provided
by health centers were not considered as reimbursable benefits by
Medicaid.  As a result, health centers had fewer financial resources
to subsidize care for patients who could not pay and for conducting
other program activities.  In recognition of this problem, the
Congress--as part of the Omnibus Budget Reconciliation Act of 1989
(OBRA 89)--created a new Medicaid and Medicare cost-based
reimbursement system for health centers.  Under this system, both
programs were required to reimburse health centers for the reasonable
cost of medical and enabling services provided to their
beneficiaries. 

The second major development has been the move by states to managed
care delivery systems for their Medicaid programs to address rising
costs and access problems.  Managed care in Medicaid is not a single
health care delivery plan but a continuum of models that share a
common approach.  At one end of the continuum are prepaid or
capitated models that pay health organizations a per capita amount
each month to provide or arrange for all covered services.  At the
other end are primary care case management (PCCM) models, which are
similar to traditional fee-for-service arrangements except that
providers receive a per capita management fee to coordinate a
patient's care in addition to reimbursement for the services they
provide.  Both systems require that beneficiaries access care through
a primary care provider.  Between June 1993 and June 1994, the total
number of Medicaid beneficiaries in managed care programs across the
country increased 57 percent, from almost 5 million to nearly 8
million, with most of the growth occurring in fully capitated managed
care programs. 

Health centers may not be as assured that capitated reimbursement
will cover their costs as they are under traditional Medicaid
fee-for-service systems.  This becomes a concern when health centers
lose their cost-based reimbursement under Medicaid prepaid managed
care programs.  Health plans that contract with centers reimburse
them on the basis of a negotiated per capita rate for a set of
services.  This capitation rate must be sufficient to cover the cost
of the contracted services for all Medicaid health plan members
enrolled at the health center.  Incorrect assumptions about the cost
of individual services or the frequency with which they are used may
result in an inadequate capitation rate.  If the rate is too low, it
can lead to financial losses for the centers. 

States establishing managed care programs that require beneficiaries
to enroll in a Medicaid health plan must obtain one of two types of
waivers from the Health Care Financing Administration (HCFA). 
Section 1115 of the Social Security Act offers authority to waive a
broad range of Medicaid requirements.  Eight states have approved
statewide 1115 waivers, and 12 others have waiver proposals pending
with HCFA.  A second type of waiver is allowed by section 1915(b) of
the Social Security Act.  These waivers allow states to carry out
competitive programs by waiving specific program requirements, such
as a beneficiary's choice of provider.  Currently, 37 states and the
District of Columbia have 1915(b) waivers and 4 other states have
pending waivers. 

The loss of cost-based reimbursement is a major concern for health
centers entering into prepaid capitated agreements.  These health
centers are concerned that (1) the per capita monthly rate may not
adequately cover the costs of providing services to the most
vulnerable populations and (2) the lack of reimbursement by health
plans for some medical, enabling, or other health services may hinder
their ability to continue to provide them.\5


--------------------
\5 Because of concerns that the loss of cost-based reimbursement will
lead to service cutbacks and health center closures, the National
Association of Community Health Centers has filed suit to stop
implementation of four approved section 1115 waivers as well as the
approval of additional waivers. 


   HEALTH CENTERS PARTICIPATING IN
   MANAGED CARE CONTINUE TO
   PROVIDE MEDICAL AND ENABLING
   SERVICES TO THEIR COMMUNITIES
------------------------------------------------------------ Letter :3

Changes in the health care delivery environment are impacting
community health centers as more and more health centers participate
in prepaid managed care arrangements.  In our review of 10 health
centers, we found that prepaid reimbursement for services provided to
Medicaid patients did not diminish the centers' ability to provide
access to care for their patients.  In fact, health centers have
improved their overall financial positions to some degree while
maintaining or expanding medical and enabling services.  This is due
to revenue increases from a variety of sources, such as federal
funding other than health center grants.  Earnings from prepaid
managed care were modest and did not contribute significantly to the
support of enabling services and subsidized care.  Some center
officials, however, credited the predictability of monthly capitation
payments as assisting them in financial planning.  Using another
measure to determine financial vulnerability--cash balances--all 10
centers had limited cash balances.  For centers with more than 15
percent of their total revenue from prepaid managed care, low cash
balances could be a problem if they encounter significant unexpected
expenses resulting from inadequate capitation rates or assumption of
risk for nonprimary care services. 


      INCREASING PARTICIPATION IN
      PREPAID MANAGED CARE
---------------------------------------------------------- Letter :3.1

In response to the changing health care environment, the number of
health centers accepting capitated payments for their Medicaid
patients grew from 92 health centers, with 280,000 prepaid patients
in 1991, to 115 centers with nearly 435,000 prepaid patients in
1993.\6 Health centers often feel pressure to enter into managed care
arrangements when states implement such programs on a mandatory or
voluntary basis statewide.  Five of the 10 health centers we visited
operate in areas where Medicaid beneficiaries are mandated to
participate in prepaid managed care plans under Medicaid waivers. 
Increasingly, health centers also choose to participate in areas with
voluntary programs.  Whether mandatory or not, health center
participation is driven by the growing importance of the Medicaid
program to health center revenues.  In 1993, Medicaid revenues
accounted for 17 percent to over 50 percent of health center revenues
at the centers we visited.  In addition, between 1989 and 1993, 6 of
the 10 health centers experienced an increase in the ratio of
Medicaid revenues to total revenues.  At the same time, 9 health
centers experienced a decrease in the amount that federal community
health center project grants represented of total revenues.\7 \8 (See
fig.  1.)


   Figure 1:  Percentage of Health
   Center Receipts, by Source

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

The degree to which health centers were involved in prepaid managed
care varied considerably among the 10 health centers.  In 1993,
prepaid managed care accounted for as little as 3 percent and as much
as 52 percent of the total health center revenues (see fig.  2). 
Differences also existed in the percentage that prepaid managed care
revenues represented of total Medicaid revenues, ranging from about
12 to 100 percent of total Medicaid revenues among the 10 centers. 

   Figure 2:  Medicaid
   Fee-for-Service and Prepaid
   Managed Care Receipts

   (See figure in printed
   edition.)

Typically, health centers participate in prepaid managed care through
health plans serving Medicaid beneficiaries.  The health centers
contract with one or more health plans to provide a subset of health
plan services.  Reimbursement for primary care services at the 10
health centers we reviewed was paid as a monthly capitated rate.\9
The capitation rates for primary care services ranged from $12 per
member per month at one health center to $38 per member per month at
another.  Rates varied in large part because of the different
services covered under health plan contracts.  For example, a center
receiving a higher rate may provide additional services, such as X
rays and immunizations.  If a center with a lower rate provides these
services to plan enrollees, it could receive additional reimbursement
on a fee-for-service basis.  Some centers also told us that they had
received a higher rate because they had negotiated for one with the
health plan. 

In addition to agreeing to provide primary care services, four health
centers have assumed financial responsibility for referrals,
hospitalization, or both in return for a higher capitation rate.\10
In such arrangements, the managed care plan withholds a portion of
the health center's primary care capitation payment to cover referral
or hospitalization costs that are higher than expected.  In some
cases, if the funds withheld are insufficient to cover the losses,
the amount withheld in the future from health center capitation
payments can be increased. 


--------------------
\6 While 1994 figures are not yet available, the BPHC believes they
will likely show accelerating growth in health center participation
in prepaid managed care as more states implement mandatory Medicaid
managed care systems. 

\7 Some of these health centers have also increased the percentage of
their revenues from other income sources, such as state and local
grants or other federal grants. 

\8 Except for Sunshine Health Center and Lynn Community Health
Center, which received, respectively, 22 and 17 percent of their
revenues in 1993 from other federal grants, contracts, or both, the
remaining health centers received less than 7 percent of their
revenues directly from other federal grants. 

\9 While health centers can be reimbursed on either a capitated or
fee-for-service basis, the most common arrangement between health
centers and health plans is a capitated payment for primary care
services only.  Other arrangements exist; for example, one Medicaid
health plan pays its primary care providers, including health
centers, on a discounted fee-for-service basis. 

\10 Of these four, one health center shares this financial
responsibility with the managed care plan. 


      HEALTH CENTERS ARE CURRENTLY
      ABLE TO PROVIDE SERVICES TO
      THE UNDERSERVED
---------------------------------------------------------- Letter :3.2

Despite the concern that capitation would make it difficult for
health centers to maintain their service levels, we found that the 10
centers continue to offer many services targeted to the needs of
their communities and that they have maintained the intensity and
frequency of the services provided.  In addition to medical care,
many of the health centers offer transportation and translation
services as well as health education, acquired immunodeficiency
syndrome (AIDS) case management, and early intervention services for
children of substance abusers.  These enabling services are very
important in reducing the barriers to health care as well as helping
to address problems that can lead to the need for further medical
care.  In addition, these services are available to all health center
patients including those whose benefit package may not cover the cost
of these services.  (See fig.  3 for a list of the enabling services
provided at each health center.)

   Figure 3:  Health Center
   Programs and Services

   (See figure in printed
   edition.)

Indicators of a health center's ability to increase access to the
community it serves include growth in the number of patients served
and in the amount of funds spent on subsidizing low-income care.  All
the health centers increased access to medical care.  The number of
medical patients served by the health centers increased from 131,000
to almost 169,000 from 1989 to 1993, with individual center increases
ranging from 4 to 164 percent (see fig.  4).  In addition, the number
of patient visits or encounters increased from 596,063 to 828,848
between 1989 and 1993 at the 10 health centers. 

   Figure 4:  Health Center
   Medical Patients

   (See figure in printed
   edition.)

Between 1989 and 1993, 7 of the 10 health centers increased their
spending on subsidized low-income care; that is, the amount of
spending for free care and the remaining portion of care that
uninsured low-income patients are unable to cover (see fig.  5). 

   Figure 5:  Subsidized Care for
   Low-Income Patients

   (See figure in printed
   edition.)

We examined the growth of spending on enabling services in each
health center, another indicator of a health center's ability to
increase access to care.  We found that all 10 of the health centers
had increased spending on these services between 1989 and 1993 (see
fig.  6).  Further, health center officials told us that enabling
services were expanded or enhanced in response to growing community
needs.  In addition, officials at all 10 centers reported that the
intensity or frequency of services typically provided at the center
had not been reduced with prepaid managed care. 

   Figure 6:  Spending on Enabling
   Services

   (See figure in printed
   edition.)

While the amount of spending on enabling services and subsidized
low-income care generally increased among all health centers, these
amounts varied considerably from center to center as did the
distribution of spending between enabling services and subsidized
care of low-income patients.  In most cases the sum of spending on
enabling services and subsidized care exceeded revenues received from
the Community and Migrant Health Center program grant (see fig.  7). 

   Figure 7:  Revenue from Health
   Center Grants and Spending on
   Enabling Services and
   Subsidized Care

   (See figure in printed
   edition.)

   .
   .
   .
   .
   .


   (See figure in printed
   edition.)

With more spending on enabling services, 9 of the 10 health centers
increased the number of full-time-equivalent staff involved in
providing services other than medical or dental.  These included
health education, social services, and case management.  Staff
providing these services included drivers for transportation
services, outreach workers, dietary technicians, and home health
aides (see fig.  8). 

   Figure 8:  Nonclinical
   Full-Time-Equivalent Staff

   (See figure in printed
   edition.)

   .

   (See figure in printed
   edition.)

Center officials told us that community needs largely influenced
patterns of spending on enabling services and to subsidize low-income
care.  For example, the health centers that we visited in densely
populated areas spent more money on enabling services, which include
social case workers, than the other centers.  The health centers in
less populated areas tended to subsidize low-income care to a greater
extent.  Officials also reported that changing local community
conditions--such as an increase in drug abuse or AIDS--could affect
the combination of enabling services and subsidized care. 


      HEALTH CENTERS HAVE IMPROVED
      THEIR FINANCIAL POSITIONS
      WHILE MAINTAINING SERVICES
---------------------------------------------------------- Letter :3.3

While maintaining or expanding their medical and enabling services,
all the health centers that we studied reported improved financial
positions, as indicated by increases in their year-end fund balances;
that is, the excess between a center's assets and liabilities.\11 One
contributing factor is an increase in total revenues.  Among the 10
health centers, increases in total revenues ranged from 35 percent to
142 percent between 1989 and 1993.  Three of the centers saw revenue
increases of over 100 percent during this period. 

Improvement in fund balances results when increases in revenues from
a variety of sources are greater than a center's expenses.  Five
centers had increases in grants from other federal and state sources. 
For example, one health center received $556,000 from a Ryan White
AIDS grant in 1993.\12 All health centers, however, had increases in
their Medicaid revenue between 1989 and 1993.  Increases ranged from
12 percent at one center to over 1,000 percent at another.\13
Medicaid prepaid managed care income also contributed modestly to
fund balance increases. 


--------------------
\11 Fund balance information was taken from health center financial
statements.  These statements may be stand-alone for primary care
services or consolidated with other operations of the community
health center.  Health center assets may include property, plant,
equipment, inventory, and receivables, all of which may not be easily
convertible to cash. 

\12 The Ryan White Comprehensive AIDS Resource Emergency Act of 1990
(P.L.  101-381) was enacted to improve the quality and availability
of services for individuals and families with the human
immunodeficiency virus (HIV). 

\13 The 1,000-percent increase at the one center was due to a
combination of factors.  Not only did the center see a growth in its
Medicaid population, it also began to receive a higher rate of
reimbursement for Medicaid patients as cost-based reimbursement was
implemented. 


      PREPAID MANAGED CARE
      REVENUES SUPPORT MEDICAL
      SERVICES BUT PLAY A SMALL
      ROLE IN SUPPORTING OTHER
      SERVICES
---------------------------------------------------------- Letter :3.4

Prepaid managed care earnings were modest at best and played a small
role in supporting enabling services and subsidized care.  In 1993,
three centers reported losses of up to $124,000 from prepaid managed
care.  Other funds offset these losses.  During the same year, six
centers reported excess prepaid managed care revenues of up to
$100,000 after paying the cost of care for medical services and
administrative expenses.  One center reported no excess revenues from
prepaid managed care. 

Officials at nine of the health centers told us that returns from
managed care had not contributed significantly to center support of
enabling services and subsidized care.  At the tenth center, however,
the director told us that growth in managed care revenues had allowed
the center to increase its spending on subsidized care.  Between 1989
and 1993, the center's health center grant funding remained level,
while the amount of spending on subsidized care grew from nearly $1.6
to $2.5 million revenues from prepaid managed care contributed to the
spending on subsidized care.  At the same time, the director noted
that the federal health center grant was indispensable to the
center's maintaining a steady level of funding for enabling services
and subsidized care.  Officials from three health centers told us
that the predictability of monthly capitation reimbursements allowed
them to better manage center finances. 


      DESPITE INCREASES IN FUND
      BALANCES SOME CENTERS ARE
      VULNERABLE TO UNEXPECTED
      LOSSES
---------------------------------------------------------- Letter :3.5

Although all the health centers have increased their year-end fund
balances, some may be vulnerable to financial difficulties.  While
all 10 health centers had year-end fund balance increases, none of
the centers had cash on hand to cover more than 60 days of operating
expenses.\14

Cash on hand ranged from fewer than 1 day of operating expenses at 2
centers to 31 days' worth at another.  Three centers only had
available cash to cover fewer than 10 days of operating expenses.\15

Cash reserves are important because they represent liquid assets that
can be used to pay for contractual obligations and unexpected
expenses.  Funds for unexpected expenses are especially critical for
health centers with more than 15 percent of total revenues from
prepaid managed care arrangements and those that have accepted
financial responsibility for services other than primary care.\16

For example, when centers take on risk for medical care and
hospitalization but more patients than expected require costly
treatment or extended hospitalization, losses could be substantial. 
We found that seven centers received more than 15 percent of their
total revenue from prepaid managed care.  The four centers that have
assumed financial responsibility for specialty referrals,
hospitalization, or both all had cash reserves of 31 or fewer days of
operating expenses, thereby making them vulnerable to financial
difficulties. 

Centers can also be financially vulnerable when capitation rates do
not fully cover the cost of the care they provide.  Centers are faced
with either depleting their reserves or cutting back services. 
Several health center directors told us that their capitated
reimbursements are adequate to cover the costs of medical services
and some believed that their capitation rate roughly equaled what
they would receive from cost-based reimbursement.  In most cases,
however, center directors could not provide us with data to
substantiate their position. 


--------------------
\14 In 1992, the Congress amended sections 329 and 330 of the Public
Health Service Act to allow health centers to establish cash
reserves.  These reserves would be available to the grantees to cover
unexpected expenses, some of which could result from prepaid
services.  In June of 1994, BPHC issued guidance to health centers on
how to implement the 1992 amendments.  However, BPHC did not specify
an amount of cash reserves that centers are required to maintain
because centers differ in the amount of revenue derived from prepaid
managed care and in financial risk assumed by centers for nonprimary
care services.  BPHC believes that a cash reserve equivalent to
normal expenses for 60 to 90 days would be reasonable for centers
assuming financial risk for primary care services.  In addition, BPHC
believes that a much larger reserve would be required of centers
assuming financial risk for specialty and hospital services. 

\15 Because our review of health centers was conducted for the period
of 1989 through 1993, and the BPHC guidance for establishing cash
reserves was issued in mid-1994, none of the centers had established
such reserves.  We compared the centers' cash and investments that
would be used to establish a reserve.  BPHC anticipates that these
reserves will be established over a period of time starting with the
1995 grant period. 

\16 This is a BPHC-suggested benchmark. 


   LESSONS LEARNED FROM HEALTH
   CENTER EXPERIENCE WITH PREPAID
   MANAGED CARE
------------------------------------------------------------ Letter :4

While the health centers we visited are now providing medical and
enabling services to their communities, some initially faced several
problems that are likely to confront other health centers as states
expand Medicaid managed care.  First, health centers must determine
whether not participating in managed care arrangements will affect
the number of patients served or revenues needed for financial
viability.  Centers that do participate may face financial problems
if reimbursement is inadequate and they accept too much financial
risk or lack managed care skills. 


      HEALTH CENTERS THAT DO NOT
      PARTICIPATE IN PREPAID
      MANAGED CARE RISK LOSING
      PATIENTS
---------------------------------------------------------- Letter :4.1

Directors of most of the health centers we visited felt compelled to
enter into agreements with Medicaid managed care plans to maintain
their Medicaid patient population and revenues.  The Medicaid
population is an important component of the medically underserved
population that health centers are intended to serve.  Health centers
that do not have agreements with Medicaid health plans can lose some
or all of their Medicaid patients and revenues, jeopardizing their
continued operation.  Because Medicaid revenue is a large and growing
part of most health centers' funding, losing this funding could be
catastrophic. 

In 1994, a health center in Washington state experienced severe
financial difficulties when its relationship with the only local
Medicaid health plan was discontinued.\17

The structure of the health plan, which limits membership to
individual physicians, made it impossible for the health center to
contract directly with the plan.  Rather, one physician employed by
the center contracted with the plan.  When this physician resigned
from the center, its relationship with the plan ended.  The center's
other physicians were not acceptable to the health plan because of
concerns about the physicians' admitting privileges at the local
hospital and their ability to guarantee 24-hour coverage or because
the physicians were not willing to contract with the plan.\18 Because
all Medicaid beneficiaries in the health center's service area were
enrolled in this health plan, the center lost 1,000 Medicaid patients
when they were assigned to other health plan providers.  As a result,
the center abruptly lost one-third of its patients and 17 percent of
its revenue over a 7-month period.  The center's director told us
that without this revenue the center was not viable and eventually
would have to close.  The center reestablished its relations with
this health plan when the physician returned and Medicaid patients
are being reassigned. 

Also in 1994, health centers in another state, Tennessee, faced the
loss of Medicaid revenues if they did not participate in the TennCare
program.  As a result, all the health centers in Tennessee
participate in the TennCare program despite their loss of cost-based
reimbursement.\19

Health centers had no choice but to contract with the TennCare health
plans, according to the director of the Tennessee Primary Care
Association, an association of community health centers in Tennessee. 
Health centers felt compelled to participate because the Medicaid
population is an important part of the health centers' target
population.  In addition, without the Medicaid revenue, health
centers would not be able to continue to offer the range of services
they typically provide.  Some center officials believed that centers
would have closed without this revenue. 


--------------------
\17 Although we visited this center, we did not select it for
detailed study because of its short tenure as a federally funded
community health center. 

\18 Physicians joining this plan must accept financial responsibility
for ensuring continued care of plan members if the health plan
becomes insolvent. 

\19 The National Association of Community Health Centers has sued the
Secretary of HHS to invalidate the section 1115 statewide waiver
granted to Tennessee to implement a statewide Medicaid managed care
program. 


      HEALTH CENTERS THAT DO
      PARTICIPATE MAY INCUR
      FINANCIAL RISKS
---------------------------------------------------------- Letter :4.2

While the 10 health centers we studied expanded their support for
enabling services between 1989 and 1993, the early experience of 3 of
these centers with managed care was problematic.  Each reported
initial depletion of financial resources, and in one case a cutback
in services occurred as well as a reorganization due to bankruptcy. 
Early center problems stemmed from

  inadequate capitation rates paid to health centers;

  assignment of more financial risk to health centers than they were
     capable of managing; and

  a lack of managed care knowledge, expertise, and systems. 

Low primary care capitation rates and assignment of financial risk
for referral services contributed to financial difficulties at two
Philadelphia health centers in 1987 and 1988, according to health
center and BPHC officials.  Because the capitation rate did not fully
cover the centers' operating costs, the centers were forced to
deplete their cash balances to continue providing services.  Both
centers reported that they could not negotiate higher rates or avoid
accepting too much financial risk in part because the Medicaid
beneficiaries were all assigned to one health maintenance
organization.  This left the health centers in a poor position to
negotiate a higher capitation rate or different risk arrangements. 
Since that time, competing health plans have been added to the
Medicaid managed care program.  In addition, the health centers are
more knowledgeable about managed care arrangements.  They no longer
accept risk for services that they do not provide and have negotiated
more acceptable rates.  After one of the Philadelphia centers gained
experience in tracking managed care operations, it developed data in
1991 showing that the utilization patterns of its health plan
enrollees justified a higher capitation rate. 

An Arizona health center also suffered financial difficulties once it
entered into Arizona's Medicaid managed care program, established in
1982.  According to the center's current director, capitation rates
were inadequate to cover the costs of serving patients in Arizona's
Medically Needy/Medically Indigent eligibility category.\20 In the
early 1980s, the center had accepted financial risk for all medical
services, including referrals and hospitalizations for its enrollees. 
Further, the center did not have adequate information systems to
manage the risk it had assumed or adequate capital to absorb losses. 
Within 4 years the center became insolvent and reorganized under
chapter 11 of the Federal Bankruptcy Code.  It was forced to cut back
on its medical and enabling services as it reorganized through
bankruptcy in 1986 after experiencing large managed care losses.  The
health center has completed its restructuring and is now a provider
for several health plans.  In addition, the health center no longer
accepts full financial risk for referrals or hospitalizations. 


--------------------
\20 This is an eligibility category specific to Arizona's program. 
Applicants are allowed to subtract the previous years' medical
expenses from the applicants' annual income.  In 1992, the qualifying
income level after the spend-down was $3,200 for an individual. 


   BPHC PROVIDES ASSISTANCE TO
   HEALTH CENTERS ENTERING PREPAID
   MANAGED CARE
------------------------------------------------------------ Letter :5

The explosive growth in Medicaid managed care leaves many community
health centers with little choice about participating in these new
arrangements.  However, health centers entering prepaid arrangements
are faced with a series of new activities, each of which they must
manage well to succeed.  First, they must negotiate a contract that
pays an adequate capitation rate and does not expose them to undue
risk or otherwise hinder them.  They must also perform the medical
management functions of a prepaid system.  In addition, health
centers must monitor their financial positions under each managed
care agreement, including any liability for referral and hospital
services.  They must also develop and maintain the information
systems needed to support the above clinical and financial management
activities.  BPHC has strongly encouraged health centers to consider
participating in managed care arrangements, while cautioning them of
the dangers of accepting risk for services provided by others. 
Further, BPHC is funding a number of activities to help health
centers become providers that can effectively operate in a managed
care system. 

Recognizing that health centers require both specific and general
knowledge of managed care, BPHC cooperates with the National
Association of Community Health Centers to provide training and
technical assistance to grantees.  Several training sessions are
available to BPHC grantees.  Subjects include managed care basics,
negotiating a managed care contract, medical management, and rate
setting.  In 1994, 48 sessions in 35 states were provided, reaching
over 1,500 individuals.  Technical assistance consists of intensive
one-on-one consultations between managed care experts and health
center officials.  During 1994, 65 health centers requested and
received one-on-one technical consultations. 

BPHC has also developed various publications for health centers to
use as self-assessment tools.  These publications offer guidance on
aspects of managed care such as preparing for prepaid health
services, negotiating with managed care plans, and assessing the
market area and internal operations. 

Realizing that health centers lack experience in negotiating
contracts with health plans, BPHC offers a contract-review service
between centers and health plans.\21 These contracts are typically
reviewed by outside private-sector managed care specialists who
provide written advice on specific sections that could be revised
more favorably for health centers.  In 1994, BPHC reviewed 45
contracts for approximately 30 health centers. 

In addition to activities targeted toward individual health centers,
BPHC also assists centers in planning and initiating participation in
managed care arrangements through the ISN, established in 1994. 
These one-time awards are to be used by health centers for planning
and developing an integrated delivery system with other providers
that will ensure access for the medically underserved.  Approximately
$6 million was awarded to 29 health centers in 1994. 

One of the health centers we visited in Florida is using an ISN award
to develop a network of community health centers that can negotiate
with managed care plans.  In Washington state, a health center
received an ISN award to help establish a statewide Medicaid managed
care plan. 


--------------------
\21 Our review of health center contracts with managed care
organizations showed that many left key contractual elements (scope
of services, access to accounting information, assignment of members,
and the like) unspecified or unclear. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

As states move to prepaid managed care to control costs and improve
access for their Medicaid populations, the number of participating
health centers continues to grow.  Medicaid prepaid managed care is
not incompatible with health centers' mission of providing access to
health care for medically underserved populations.  However, health
centers face substantial risks and challenges as they move into these
arrangements.  Such arrangements require new knowledge, skills, and
information systems.  Centers lacking this expertise face an
uncertain future and those in a vulnerable financial position are at
even greater risk. 

Today's debate over possible changes in federal and state health
programs--including Medicaid and other health grant programs,
important funding streams for health centers, and the lack of
available cash at all 10 centers--heightens the concern over the
financial vulnerability of centers participating in prepaid managed
care.  If this funding source continues to grow as a percentage of
total health center revenues, centers must face building larger cash
reserves while not compromising medical and enabling services to the
vulnerable populations that they serve. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

HRSA and BPHC officials reviewed a draft of this report and
considered it a balanced presentation of the challenges facing
community health centers involved in Medicaid prepaid managed care
arrangements.  We also incorporated their technical comments as
appropriate. 

We are sending copies of this report to the Secretary of Health and
Human Services and other congressional committees.  Copies will be
made available to others on request.  If you or your staff have any
questions about this report, please call me at (202) 512-7119; Rose
Marie Martinez, Assistant Director, at (202) 512-7103; or Paul
Alcocer at (312) 220-7615.  Other contributors to this report include
Jean Chase, Nancy Donovan, and Karen Penler. 

Sincerely yours,

Mark V.  Nadel
Associate Director
National and Public Health Issues


CHARACTERISTICS OF COMMUNITY
HEALTH CENTERS VISITED
=========================================================== Appendix I

The health centers included in our review serve primarily minority
communities with serious health problems such as infectious diseases,
diabetes, cardiovascular disease, AIDS, and substance abuse.  In
addition to these problems, many of the communities have infant
mortality rates that are higher than the national rate.  Health
center patients are generally poor with incomes at or below 100
percent of the federal poverty level.  At some centers, over 90
percent of patients are at this poverty level.  A large percentage of
the centers' patients are covered by Medicaid but a significant
portion have no health insurance coverage.\22 Listed by state, the
following health centers were included in our review: 


--------------------
\22 Demographic, economic, and insurance data are provided for 1992
in the case of three centers, for 1993 (four centers), and for 1994
(two centers). 


   ARIZONA
--------------------------------------------------------- Appendix I:1


      MOUNTAIN PARK HEALTH CENTER
------------------------------------------------------- Appendix I:1.1

Founded in 1979, Mountain Park Health Center (MPHC) was formerly
known as Memorial Family Health Center and was part of Phoenix
Memorial Hospital.  In 1987, MPHC became a community-organized
primary care center.  The center operates in urban South Phoenix,
described as the "most multicultural community in Arizona."
Seventy-five percent of the center's patients are Hispanic and 18
percent are African American.\23 AIDS and infant mortality are among
the health problems in South Phoenix, where the infant mortality rate
for African Americans is 17.3 per 1,000 live births.  Seventy-eight
percent of the center's patients are at or below the poverty level. 
Sixty-eight percent have Medicaid coverage and 14 percent are
uninsured. 


--------------------
\23 This racial/ethnic category may include blacks from Haiti,
Jamaica, and other countries. 


      CLINICA ADELANTE, INC. 
------------------------------------------------------- Appendix I:1.2

This center's rural-based service area consists of a main site in
Surprise, Arizona, and two other sites; one in Queen Creek and
another at Gila Bend.  Eighty-eight percent of Clinica Adelante's
population is Hispanic.  Thirty-nine percent of the center's patients
are migrant and seasonal farmworkers.  Major health problems in the
population covered by the center include a lack of adequate prenatal
care, inadequate postpartum visits and newborn checks in the
perinatal population; infectious diseases, inadequate nutrition, and
dental decay in the pediatric population; and diabetes, hypertension,
and cardiovascular disease in the adult population.  Twenty-nine
percent of the center's patients have Medicaid coverage and 67
percent of them have no insurance coverage at all.  Eighty-five
percent are at or below the poverty level. 


      EL RIO SANTA CRUZ
      NEIGHBORHOOD HEALTH CENTER,
      INC. 
------------------------------------------------------- Appendix I:1.3

Established 25 years ago, the El Rio health center consists of a main
clinic and seven satellite clinics that provide medical and other
services to the medically underserved in Tucson.  With the majority
of patients residing on the south and west sides of Tucson, the
significant geographical barriers to health care access are isolation
and the remoteness of these locations as well as poor public
transportation.  The locations of other health care facilities can be
at a considerable distance from where most of the patients reside. 
In addition, language and cultural differences characterize the
patients of the El Rio center.  Almost one in seven households in the
center's service area routinely uses a language other than English in
the home.  Other factors exacerbating access to services are
proximity to the U.S.  border with Mexico, a large undocumented
population and a local and transient homeless population. 

The El Rio service area has a higher proportion of Hispanics to the
total population, 55 percent versus 23 percent.  Twenty-two percent
of other center patients are white and 14 percent are American
Indian.  Seventy-eight percent are at 100 percent or below the
poverty level.  Forty-one percent of center patients have Medicaid
coverage and 38 percent are uninsured. 


   FLORIDA
--------------------------------------------------------- Appendix I:2


      SUNSHINE HEALTH CENTER, INC. 
------------------------------------------------------- Appendix I:2.1

Since 1964, Sunshine Health Center, Inc., has provided comprehensive
primary medical and dental services to migrant and urban poor
residing in Broward County, Florida.  The Sunshine Health Center
serves a patient population of migrant and seasonal farm workers;
emigrants from various countries including Haiti, Jamaica, Puerto
Rico, and Nicaragua; and African Americans and whites, most of whom
are the poor and the working poor.  Thirty-two percent of the
center's patients are white, 30 percent are African American, and 20
percent are Hispanic. 

Located in a county that leads the United States in the increase in
AIDS patients, the center serves a population with high rates of
infant mortality and morbidity, sexually transmitted diseases, and
chronic disorders such as hypertension and diabetes.  Ninety-three
percent of the patients of the center are at or below the poverty
level.  Thirty-eight percent are Medicaid patients and 58 percent
have no insurance. 


      ECONOMIC OPPORTUNITY FAMILY
      HEALTH CENTER
------------------------------------------------------- Appendix I:2.2

From its 1967 start in a trailer, the Economic Opportunity Family
Health Center (EOFHC) has evolved into its main center, six satellite
centers, and affiliated school outreach programs serving the north
and northwest areas of Dade County.  Dade County has a large and
rapidly growing AIDS population, significant substance abuse
problems, a large migratory farmworker population, and minority
populations with extremely high incidence of tuberculosis, sexually
transmitted diseases, and infectious diseases.  The population served
by EOFHC is 70 percent African American and 20 percent Hispanic. 
Sixty-six percent of center revenues are generated primarily from the
federal government. 


   PENNSYLVANIA
--------------------------------------------------------- Appendix I:3


      SPECTRUM HEALTH CENTER, INC. 
------------------------------------------------------- Appendix I:3.1

This center began operations in 1967 to provide family planning and
general health services to women.  Located in the West Park section
of Philadelphia, Pennsylvania, the center serves an area
characterized by high infant mortality, low birthweight, teenage
pregnancy, and the spread of sexually transmitted diseases including
HIV infection.  Ninety-nine percent of Spectrum's patients are
African American and 90 percent of the center's patients are at or
below the poverty level.  Seventy-one percent of center patients have
Medicaid coverage and 27 percent have no insurance. 


      GREATER PHILADELPHIA HEALTH
      ACTION, INC. 
------------------------------------------------------- Appendix I:3.2

Greater Philadelphia Health Action, Inc.  (GPHA) is targeted to
provide health care to Philadelphia's medically underserved
population.  GPHA operates five primary health care centers, a drug
and alcohol counseling and treatment program, a child care program,
and two comprehensive school-based clinics.  Philadelphia's health
care problems include an infant mortality rate of 14.2 deaths per
1,000 live births; an 11.7-percent low-birth-weight rate; a high teen
birth rate of 49 births per 1,000 females (up from 46 per 1,000 in
1988); increasing rates of substance abuse, especially among women;
and increasing rates of HIV/AIDS.  The vast majority of patients are
African American (73 percent) and have incomes at or below 100
percent of the federal poverty level (88.5 percent).  Seventy-three
percent have Medicaid coverage and 22 percent are uninsured. 


   MASSACHUSETTS
--------------------------------------------------------- Appendix I:4


      LYNN COMMUNITY HEALTH CENTER
------------------------------------------------------- Appendix I:4.1

The Lynn Community Health Center (LCHC) was organized in 1971 as a
small storefront mental health center.  It has grown into a
comprehensive care facility that is the largest provider of
outpatient primary care in Lynn, a city characterized by the center's
executive director as the most medically underserved area in
Massachusetts. 

LCHC's programs focus on people with the greatest barriers to care: 
the poor, minorities, new immigrants, non-English speaking people,
teens, and the frail elderly.  Sixty percent of the population served
by the center do not consider English to be their first language.  At
present, Spanish and Russian are the most common languages spoken by
the center's patients.  Over 30 percent of LCHC's staff is bilingual
or multilingual and can provide translation services in Spanish,
Khmer, Vietnamese, Laotian, and Russian. 

Forty-five percent of center patients are white, 35 percent are
Hispanic, and 11 percent are African American.  Sixty-three percent
are at or below the poverty level.  Fifty-six percent have Medicaid
coverage and 31 percent have no insurance. 


      GREAT BROOK VALLEY HEALTH
      CENTER, INC. 
------------------------------------------------------- Appendix I:4.2

This center was founded in 1972 by a group of mothers living in
Worcester's largest housing project--the Great Brook Valley and
Curtis Apartments.  These women founded the center because they and
their children lacked access to primary care.  The center has grown
from providing well-child care services to the residents of public
housing projects to a comprehensive health center serving the
surrounding neighborhood. 

Special populations requiring services include the perinatal
population (in Worcester, rates in two areas--infant mortality and
low-birth-weight infants--have been above the state average for the
past decade) and the Spanish-speaking elderly population who are
monolingual.  In addition, the HIV/AIDS epidemic is growing in
Worcester, particularly among the minority populations and among the
estimated 4,000 injection drug users in the city.  In addition,
adolescents are exposed to high levels of stress, violence, and
depression. 

The Hispanic community represents 76 percent of center patients. 
Ninety-five percent of those using the center are at or below the
poverty level.  Fifty-five percent are covered by Medicaid and 30
percent have no insurance. 


      ROXBURY COMPREHENSIVE
      COMMUNITY HEALTH CENTER,
      INC. 
------------------------------------------------------- Appendix I:4.3

Roxbury Comprehensive Community Health Center (RoxComp), established
in 1969 by a mother concerned about the lack of medical services in
the Roxbury community, is the largest community health center serving
the Roxbury and North Dorchester areas.  Health status indicators for
these communities are higher than the national average.  For example,
the infant mortality rate is twice the national average of 10.1 per
1,000 live births.  The area served by the center also exceeds the
national average in deaths from heart disease, cancer, stroke,
pneumonia, influenza, cirrhosis, homicide, suicide, and injuries. 
Approximately 20 percent of reported AIDS cases in Boston come from
this area.  Substance abuse among patients 19 years old and younger
and among pregnant women is a problem in the area. 

Residents served by the center are poor, with 91 percent at or below
the poverty level.  Eighty-eight percent of center patients are
African American.  Sixty-two percent have Medicaid coverage and 26
percent have no insurance. 


SCOPE AND METHODOLOGY
========================================================== Appendix II

To examine how Medicaid prepaid managed care affected community
health centers' ability to continue their mission of providing
community-based health care to underserved populations, we first
selected a nonrandom judgmental sample of states with a variety of
Medicaid managed care situations.  The states included Arizona,
Florida, Massachusetts, and Pennsylvania, whose prepaid managed care
programs included (1) mandatory and voluntary enrollment of
beneficiaries, (2) statewide and more geographically limited
programs, and (3) capitated Medicaid programs implemented with and
without waivers (see table II.1). 



                          Table II.1
           
            Characteristics of Four State Programs

               Mandatory      Statewide
State          enrollment     program        Waiver type
-------------  -------------  -------------  ---------------
Arizona        Yes            Yes            Section 1115

Florida        No             No             1915(b)\a

Massachusetts  No             No             1915(b)\a

Pennsylvania   Yes            No             1915(b)
------------------------------------------------------------
\a These waivers are for primary care case management model programs
that do not involve capitated payments. 

In each state, we then visited selected health centers that had
prepaid managed care plans operating in their areas for at least 3
years and gathered at least 5 years' worth of audited financial
statements.  Program data for the same period were obtained from
health center responses to the Bureau of Primary Care's Common
Reporting Requirements.\24

To determine whether health centers were encountering financial
difficulties while engaged in prepaid managed care operations, we
compiled data on their financial positions.  Specifically, we
reviewed data on year-end fund balances, which represent the excess
between center assets and their liabilities.  In addition, we
calculated the number of days of operating expenses that cash
balances could support.\25

We analyzed program data in several different ways.  To determine
whether health centers were maintaining access for underserved and
vulnerable populations, we compiled data on the number of patients
served and the number of patient encounters--a proxy measure for
patient visits.  To determine whether health centers were continuing
to provide enabling services to their communities, we compiled data
on spending for other health and community services, including
transportation and translation services.  In addition, we reviewed
the number of full-time-equivalent staff hired to provide these
services.  To determine whether health centers were continuing to
provide care to indigent and low-income patients, we compiled data on
the amount of subsidized care.  To determine whether health centers'
sources of funds were changing under prepaid managed care, we
compared these sources to total receipt of funds. 

We also conducted work in two states that have more recently begun
capitated Medicaid managed care programs--Tennessee and Washington. 
Washington is making specific accommodations for health centers as it
implements its Healthy Options program and is helping the centers
establish their own Medicaid health plan.  In contrast, Tennessee has
so far not made programmatic changes to accommodate health centers,
such as requiring their inclusion as providers. 

At all the health centers we visited, we toured the facilities and
interviewed administrators.  We also interviewed officials of health
plans operating in the area, some that contracted with health centers
and some that did not; state community health center associations;
and state Medicaid officials.  We also interviewed BPHC, HRSA, and
National Association of Community Health Center officials. 

Because we selected our sites judgmentally, our results do not
necessarily represent all health centers' experience with prepaid
managed care but illustrate the kinds of issues faced by health
centers in these systems. 

Our work was performed between January 1994 and March 1995 in
accordance with generally accepted government auditing standards. 

--------------------
\24 We did not independently verify the data contained in these
reports. 

\25 Daily operating expenses were calculated by dividing total
expenses as reported on annual financial statements by 365 days as
defined by generally accepted accounting principles.  Cash available
included cash and investments such as certificates of deposit
reported on annual financial statements.  The number of days of
operating expenses covered by available cash was determined by
dividing cash balances by daily operating expenses. 

