Medicaid Managed Care: More Competition and Oversight Would Improve
California's Expansion Plan (Letter Report, 04/28/95, GAO/HEHS-95-87).

Pursuant to a congressional request, GAO reviewed California's Medicaid
managed care program, focusing on: (1) state oversight of managed care
contractors; (2) state plans for expansion; and (3) key issues in
implementing the expanded program.

GAO found that: (1) California plans a major expansion of its Medi-Cal
managed care program in selected counties; (2) by the end of 1996, the
number of enrollees in California managed care plans will total over 3.4
million, almost four times the number currently enrolled; (3) enrollment
will be mandatory for women and children, who will choose from one of
two plans, unlike the current voluntary system with several choices; (4)
mandatory enrollment could magnify the problems already associated with
California's Medi-Cal program, such as availability and quality of
services, capabilities of management staff, and providers' financial
incentives to limit care; and (5) any benefits of competitive managed
care could be lessened by California's decision to limit beneficiaries
to two health plans.

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

 REPORTNUM:  HEHS-95-87
     TITLE:  Medicaid Managed Care: More Competition and Oversight Would 
             Improve California's Expansion Plan
      DATE:  04/28/95
   SUBJECT:  Medicaid programs
             State-administered programs
             Health care services
             Health care programs
             Beneficiaries
             Disadvantaged persons
             Health maintenance organizations
             Quality assurance
             Women
             Children
IDENTIFIER:  California Medi-Cal Program
             California Prepaid Health Plan Program
             California County Organized Health Systems Program
             California Geographic Managed Care Program
             California Primary Care Case Management Program
             AFDC
             Aid to Families with Dependent Children Program
             Supplemental Security Income Program
             California
             Medicare Program
             Early and Periodic Screening, Diagnosis, and Treatment 
             Program
             Los Angeles County (CA)
             Solano County (CA)
             Santa Barbara County (CA)
             San Mateo (CA)
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Health and the
Environment, Committee on Commerce, House of Representatives

April 1995

MEDICAID MANAGED CARE - MORE
COMPETITION AND OVERSIGHT WOULD
IMPROVE CALIFORNIA'S EXPANSION
PLAN

GAO/HEHS-95-87

California Medicaid Managed Care


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

  AFDC - Aid to Families With Dependent Children
  COHS - County Organized Health System
  DHS - Department of Health Services
  EPSDT - Early and Periodic Screening, Diagnostic, and Treatment
  GMC - Geographic Managed Care
  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  PCCM - Primary Care Case Management
  PHP - Prepaid Health Plan
  SSI - Supplemental Security Income

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


B-257569

April 28, 1995

The Honorable Henry A.  Waxman
Ranking Minority Member, Subcommittee
 on Health and the Environment
Committee on Commerce
House of Representatives

Dear Mr.  Waxman: 

The Medicaid program was established to make health care services
more accessible to the poor.  However, in many communities throughout
the nation, Medicaid beneficiaries' access to quality care is far
from assured.  Too few physicians and other health care providers
choose to participate in the Medicaid program because of low payment
rates and administrative burdens.  In an attempt to address the
access problem, as well as rising costs and enrollment in its $15
billion Medi-Cal program which serves about 5.4 million
beneficiaries, California intends to increase its reliance on managed
care delivery systems. 

California, with about two decades of Medicaid managed care
experience, has approximately 890,000 Medicaid beneficiaries in
managed care plans.  This number would almost quadruple to 3.4
million as California expands the managed care program, beginning in
December 1995.  According to state officials, the purpose of
California's managed care expansion is to improve access and the
quality of health care.  The state expects that, in the long run,
managed care will also contain Medicaid costs by reducing unnecessary
services and delivering care more efficiently.  A number of observers
and participants, however, believe that the state's expansion plan
will not achieve its goals of improved access or reduced costs. 

Recognizing the significance of California's planned expansion and
the value the state's experience may have for other states' Medicaid
managed care programs, you requested that we review California's
current and planned Medicaid managed care programs.  Our objectives
were to (1) describe California's current Medicaid managed care
program, (2) review the state's oversight of managed care contractors
with a focus on financial incentive arrangements and the provision of
preventive care for children, (3) describe the state's plans for
expansion, and (4) identify key issues the state will face as it
implements the expanded program. 

In doing this work, we interviewed California and federal Medicaid
officials, managed care contractors, and advocacy group
representatives.  We also reviewed documents related to managed care,
including California's laws, regulations, policies, and procedures;
California's strategic plan for expanding managed care; and general
literature on financial incentives for providers of managed care. 
More detailed information on our scope and methodology is in appendix
I. 


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

California plans a major expansion of its Medi-Cal managed care
program in selected counties.  By the end of 1996, over 3.4 million
enrollees will receive health care through managed care plans--almost
four times the number now enrolled.  In selected areas, enrollment
will be mandatory for women and children, who will choose to receive
care from one of two plans.  This is a significant change from the
predominantly voluntary program the state currently administers that
allows beneficiaries to choose between fee-for-service and managed
care. 

Problems identified to date in a primarily voluntary enrollment
program could be significantly magnified in a much larger program
with mandatory enrollment.  We are concerned about whether the state
will monitor managed care plans effectively enough to minimize any
adverse effects on the availability and quality of health care
provided to Medicaid enrollees placed in mandatory managed care.  A
vital factor in the success of the program will be the capabilities
of the state's contract management staff.  The state has said it
intends to improve its monitoring and strengthen its staff
capabilities through enhanced contract requirements and the hiring of
more staff.  We are also concerned that the state does not give
enough attention to the extent that providers have financial
incentives to limit needed care and that the state has difficulty
verifying whether services it pays for are actually provided,
including preventive care for children. 

The state believes its expansion plan will improve Medicaid
beneficiaries' access to care and is a major improvement over the
current fee-for-service environment.  However, we believe that any
benefits of competitive managed care will be lessened by the state's
decision to limit beneficiaries in selected areas to choosing between
two health plans.  Several areas of the state could support more than
two health plans, giving beneficiaries more choices and the state
more latitude in dealing with plans that do not meet their
commitments. 


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

Enacted in 1965 as title XIX of the Social Security Act, Medicaid is
a federally aided, state-administered medical assistance program.  At
the federal level, the program is administered by the Health Care
Financing Administration (HCFA), an agency within the Department of
Health and Human Services.  Within broad federal guidelines, each
state designs and administers its own Medicaid program, which HCFA
must approve for compliance with current law and regulations.  HCFA
is also responsible for providing program guidance and oversight to
the state programs.  Nationwide, Medicaid served approximately 34
million low-income people in fiscal year 1994, with combined federal
and state expenditures of $143 billion. 

California established its Medicaid program, named Medi-Cal, in 1965. 
The cost of the Medi-Cal program was estimated to be about $15
billion in federal and state funds in fiscal year 1994, serving about
5.4 million people.  The California Department of Health Services
(DHS) is the agency responsible for administering the Medi-Cal
program.  It determines policy, establishes fiscal and management
controls, contracts with managed care health plans, and reviews
program activities. 

California has over 20 years of experience with Medi-Cal managed care
programs.  DHS began contracting with Prepaid Health Plan (PHP) pilot
projects in 1968.  Abuses and scandals plagued the early years of PHP
contracting, resulting in beneficiaries being denied access to care. 
This led the California legislature to pass the Waxman-Duffy Prepaid
Health Plan Act in 1972, which established standards for California
Medicaid PHP contracts and for program administration.  Controls have
been continually strengthened over the years through amendments to
the Waxman-Duffy Act.  The Knox-Keene Health Care Service Plan Act of
1975 gave the California Department of Corporations authority to
license and regulate fully capitated PHPs in the state.  One
Waxman-Duffy amendment made Knox-Keene licensure a prerequisite to
obtaining a Medi-Cal PHP contract.  With the advent of the
Waxman-Duffy and Knox-Keene acts, the majority of then-contracting
PHPs had to leave the Medi-Cal program because they failed to meet
the new standards. 

Beginning in the 1980s, the state enacted several pieces of
legislation authorizing the development and testing of alternative
ways to deliver managed health care services to Medi-Cal
beneficiaries.  The first legislation, in 1981, authorized the
development of pilot Primary Care Case Management (PCCM) programs.\1
Subsequent legislation, in 1982, authorized County Organized Health
Systems (COHS) and a Geographic Managed Care (GMC) program, and also
permitted routine PCCM contracting. 


--------------------
\1 PCCMs are entities that contract with the state to provide
enrolled beneficiaries with physician and outpatient services on a
capitated basis. 


   CALIFORNIA'S CURRENT MEDICAID
   MANAGED CARE PROGRAM
------------------------------------------------------------ Letter :3

Medi-Cal managed care is currently built on a foundation of PHPs and
PCCMs.  Contractors are all paid on a capitated basis for the
services they provide; that is, the state pays the managed care plan
a monthly fee for each enrollee, and the plan assumes responsibility
for the full cost of the services it has contracted to provide.\2
PHPs are capitated to provide all basic benefits covered by Medi-Cal,
excluding a few selected services such as organ transplants, chronic
renal dialysis, long-term care, and dental care.  The capitation fee
is intended to equal DHS' cost of providing the same services on a
fee-for-service basis to an actuarially equivalent population. 

PCCMs are operated by physicians and other primary care providers who
are capitated to provide all outpatient physician services and to
manage all of the services provided to their enrollees.  They may
elect to provide certain additional services for an increased
capitation fee.  The capitation fee for PCCMs is set at 95 percent of
the fee-for-service equivalent.  All services not capitated are
available to the PCCM enrollee on a fee-for-service basis. 

DHS rewards PCCMs for effective case management by paying them a
percentage of the amount by which the state's costs for the
noncapitated services fall below the projected costs for an
equivalent non-case-managed population. 

California also uses other managed care delivery systems.  COHSs
deliver health care to Medicaid beneficiaries in three counties--San
Mateo, Santa Barbara, and Solano.  A COHS is a local agency that
contracts with the state Medicaid program to administer a capitated,
comprehensive, case-managed health care delivery system.  The COHS is
responsible for administering claims, controlling utilization, and
providing services to all Medicaid beneficiaries residing in the
county.  Beneficiaries in the COHS area must enroll in the COHS. 
They have a wide choice of managed care providers but cannot obtain
services under the traditional fee-for-service system unless
authorized by the COHS.  All Medi-Cal services are arranged for by
COHSs through subcontracts with providers.  The state plans to have
COHSs in two more counties--Orange and Santa Cruz--in 1995. 

California began a GMC pilot in Sacramento County in 1994.  Under
this project, the state contracts with several managed care plans to
serve that county's recipients of Aid to Families With Dependent
Children (AFDC) population on a mandatory basis and other Medicaid
beneficiaries on an optional basis.  The state is planning an
additional GMC project in San Diego County. 

Presently, approximately 890,000 Medicaid beneficiaries are enrolled
in managed care plans in 20 of the state's 58 counties.  Table 1
shows enrollment by type of plan. 



                Table 1

    Statewide Medi-Cal Managed Care
 Enrollment by Type of Plan (Dec. 1994)


--------------------
\2 DHS' excess risk limitation arrangements can provide partial
indemnification to plans for any individual's health care costs in
excess of a specified risk limit per contract year.  Contractors may
also purchase commercial insurance for some of their risk. 

