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How SufQty NQt Providers OrQ Adopting to the NEW EnVIrOnmQn! Safety net providers have actively been working to adjust to the new health care environment, and many have become important participants in a wide range of managed care arrangements (Kaye et al., 1999; Solloway and Darnell, 1998~. As has been stated elsewhere, Medicaid programs vary widely across the states in terms of their eligibility requirements, the depth and breadth of benefits that they provide, their provider payments, and their administrative structures and processes. The diversity of their populations, the political and economic environments, their experience with managed care, and their health system infrastructure will influence the ways in which states develop Medicaid-like programs and how these programs will position safety net providers to participate and compete in the new health care marketplace (Gold, 1999; Gold et al., 1996~. A number of Medicaid managed care programs and local market conditions have proved to be particularly instrumental in shaping the direction of safety net providers' responses to the changing marketplace and potential for success (Baxter and Mechanic, 1997; Harrington et al., 1998; Norton and Lipson, 1998~. The major relevant characteristics of Med- icaid managed care programs of importance to safety net providers in- clude (1) the extent of mandatory full-risk contracting, (2) the scope and speed of implementation, (3) the degree of contracting and other protec- tions for safety net providers (e.g., procedures for enrollment and default assignment), and (4) payment policies. Key market factors of relevance to safety net providers include (1) the level of Medicaid managed care pen- etration, (2) the degree of competition for Medicaid patients, (3) the scope of consolidation and conversion in the local health care market and the 132

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ADAPTING TO THE NEW ENVIRONMENT 133 level of for-profit health care organization, (4) the relative strengths and weaknesses of local and state policies that support of vulnerable popula- tions, and (5) safety net providers' relative market share. Researchers at the Alpha Center surveyed safety net providers in 10 communities, representing 6 states, to assess how these providers per- ceived the relative importance of market forces and Medicaid program policies on their ability to succeed in the more competitive environment (Alpha Center, 1998~. Survey results showed substantial differences in how hospitals and other safety net providers view the influence of these different factors in obtaining contracts. Hospitals saw local market condi- tions and their own organizations' strengths and weaknesses as the key determinants of contracting success. Federally qualified health centers (FQHCs) and local health departments (LHDs) also recognized the im- portance of their organizations' strengths and weaknesses but viewed state and local Medicaid policies as more influential to their survival. States have adopted managed care to control their Medicaid budgets, expand access to health care for the uninsured population, and make health care providers and health plans more accountable for performance and quality (Horvath et al., 1997; Iglehart, 1995~. Individual states may prioritize these overall objectives differently (Wooldridge et al., 1997~. For example: The state of Hawaii, with the lowest number of uninsured people in the nation, moved to mandated Medicaid managed care enrollment primarily to slow the growth of Medicaid costs and to improve the inte- gration of Medicaid and other state programs for low-income vulnerable populations. Rhode Island's Section 1115 waiver program (RIte Care) was imple- mented to expand benefits and coverage for uninsured children and preg- nant women with family incomes of 250 percent of the federal poverty level. As part of the waiver, a health plan of community health centers (CHCs) with a long track record of serving vulnerable populations was established. Tennessee moved rapidly to Medicaid managed care to avert a major budget crisis and to address the problem of large numbers of people without insurance.] 1As this report was being completed, TennCare's future fiscal viability was in significant jeopardy unless major funding to operate the current $4.3 billion program covering 1.3 million people became available. This latest crisis in the program's stormy 6-year history was generated by a December, 1999 announcement by Blue Cross Blue Shield that they would no longer participate in the program unless the state assumes some of the risk of covering TennCare enrollees. Blue Cross covers about half of TennCare's enrollees (Conover and Davies, 2000~.

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134 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED These different priorities can influence both how states implement their managed care programs and how safety net providers respond to new requirements and incentives. Given the diversity of the nation's safety net, few generalities can be made about how and in what form safety providers are participating in managed care. However, the highly competitive health care marketplace is making it virtually mandatory for safety net providers to do so (Harrington et al., 1998; Lipson, 1997~. With most states (the exceptions are Alaska and Wyoming) having implemented managed care programs, nonparticipation in managed care is a viable option only for safety net providers that have a unique market niche or that operate in immature managed care environments. This chapter reviews the current Medicaid managed care marketplace, some of the leading strategies safety net pro- viders are pursuing to respond to managed care, the key elements of successful adaptation to managed care, and the major lessons being learned. THE CHANGING MEDICAID MANAGED CARE MARKETPLACE Although federal Medicaid regulations require states to ensure access to traditional safety net providers, managed care programs can nonethe- less reduce the levels of Medicaid beneficiary utilization of safety net providers and the Medicaid revenues for these providers through a vari- ety of means. Program design features, special waivers, or ambiguous state contractual requirements can serve to limit safety net provider par- ticipation in managed care programs (Alpha Center, 1998; Rosenbaum, 1997~. Given the continuing pressure to increase states' flexibility in de- signing managed care programs, existing financial and guaranteed-access protections may be substantially modified or diminished. Additional pressures for safety net providers transitioning to man- aged care have come from the conversion in many states from the volun- tary to mandatory enrollment of Medicaid beneficiaries in managed care plans.2 In some markets this transition has taken place very rapidly, pro- viding less time for safety net providers to prepare and to solidify rela- tionships with patients before the competitors of safety net providers try to enroll patients in the competitors' plans (Harrington et al., 1998~. The design of state enrollment and assignment policies can also facilitate or hamper safety net providers' relationships and participation in managed care. 2In 199S, 37 states (82 percent of states with risk programs) reported mandatory rather than voluntary risk programs (Kaye et al., 1999~.

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ADAPTING TO THE NEW ENVIRONMENT 135 An important aspect of the changing Medicaid market is the change in the trend in managed care plans' participation in Medicaid. Between 1993 and 1996 the expansion of state Medicaid managed care programs together with increasing competition for existing market share attracted the interest of many large commercial plans that had not previously par- ticipated in Medicaid (Felt-Lisk and Yang, 1997~. During that period the number of commercial plans participating in Medicaid increased from 160 in 1993 to 335 in 1996, resulting in a net gain of 189 plans participating in Medicaid (some plans left the market or were acquired by other plans). Since 1996, however, a number of large commercial plans have exited this market, citing low reimbursement rates, the difficulties and high cost of administering Medicaid programs, and the complexity of Medicaid regu- lations (BNA's Health Care Policy Report, 1998; Hurley and McCue,1998~. A 1998 follow-up study in 15 high-volume Medicaid managed care mar- kets by Felt-Lisk (1999a) showed a 15 percent decline in the rate of partici- pation in Medicaid by commercial plans from 1996 to 1998. The exit of commercial plans has been accompanied by rapid growth in the number of Medicaid-only or Medicaid-dominated plans. These di- verse plans tend to be smaller; more than half of these plans have less than 25,000 members, and only 15 percent have more than 50,000 enroll- ees (44 percent of all full-risk managed care organizations have more than 50,000 enrollees) (Felt-Lisk,1999b). Approximately one-half of these plans are provider based, with hospitals being the most common type of pro- vider-owner. A growing number of these plans are owned and operated by traditional safety net providers, and these are represented by a wide variety of organizations, alliances, and approaches to managed care (Gray and Rowe, 2000~. CHCs, public hospitals, other hospitals, and academic medical centers all sponsor substantial minorities of these plans. Some policy makers have expressed concern that the decline in the level of commercial plan participation in Medicaid may jeopardize states' ability to offer "mainstream" plans to most Medicaid enrollees. Others suggest that current withdrawals may just represent a natural evolution or shakeout of the Medicaid managed care market. Despite considerable turnover in the commercial plans that participate in Medicaid, commer- cial plans retain a key role in serving Medicaid enrollees, even in states where multiple plans have withdrawn from Medicaid managed care (Felt- Lisk, 1999a). As the market continues to change and evolve, more re- search is needed on how participation in Medicaid by commercial plans influences access to mainstream care and how market instability may be affecting quality of care (Kaye et al., 1999~.

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136 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED SAFETY NET PROVIDER PARTICIPATION IN MANAGED CARE The resolve by safety net providers to participate in managed care has chiefly been motivated by the growing competition for Medicaid patients and revenues. This competition has been further sharpened in the face of declining national Medicaid rolls (Holahan et al., 1998~. Over the years, Medicaid became the engine that enabled CHCs to expand their services for both beneficiaries and the uninsured population. In 1980, Medicaid revenues represented only 14 percent of health center operating revenues; by 1997 that proportion had increased to 34 percent (Hawkins and Rosenbaum, 1998~. Preservation of Medicaid revenues has thus become critical to the survival of many safety net providers and, concomitantly, their ability to provide health care for the vulnerable population. By actively seeking and participating in managed care contracting, safety net providers have four major goals: (1) to maintain or expand their patient and revenue bases, (2) to reap the potential financial benefits of risk contracting, (3) to increase leverage in the Medicaid market and benefit from economies of scale through networking and other collaborative efforts, and (4) to main- tain the ability to continue to serve uninsured individuals. In striving to achieve these goals, safety net providers have identified several strategies directed to the following: seeking contracts with the state or managed care organizations (MCOs) on either a partial- or a full-risk basis; networking, affiliating, or merging with partners to gain leverage for managed care contracting and also to benefit from economies of scale that partnering can provide; implementing strategies and programs to diversify funding streams; developing and putting in place administrative and clinical proto- cols to improve performance and accountability; enhancing customer-oriented services to increase patient satisfac- tion and loyalty; making infrastructure and capital improvements designed to cre- ate attractive and efficient locations for patients to receive medical care on a regular basis; realigning medical staff and employees to improve productivity and to meet managed care requirements; and influencing the external environment by increasing advocacy ef- forts at all levels of government to receive more financial support. Although it has become virtually essential for all safety net providers

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ADAPTING TO THE NEW ENVIRONMENT 137 to pursue these strategies, the missions, roles, and competitive positions of different safety net providers make some adaptive mechanisms more important than others. Federally Qualified Health Centers and Other Ambulatory Care Providers In 1998, 65 percent of the nation's FQHCs participated in managed care nearly a 16 percent increase over the previous year's level (Bureau of Primary Health Care, 1998~. Most clinics contract for primary care only, thereby avoiding arrangements that would place them at risk for services not provided by the center, such as specialty services and hospital-based care (Harrington et al., 1998; Lewin-VHI, Inc., 1996~. CHCs are often viewed as important providers in managed care net- works because of their geographic locations, primary care capacities, and culturally sensitive services, as well as because of the special infrastruc- ture and expertise they have developed to serve the Medicaid population and those with special needs (Kalkines, Arky, Zall and Bernstein, LLP., 1998; Lipson and Naierman, 1996; West, 1999~. The ability of CHCs to offer such important enabling services as transportation, case manage- ment, and translation also is viewed as desirable. Representatives from health centers contend that since they typically operate on constrained budgets, they have ample experience in managing the utilization of ser- vices to control the costs of care (Rosenbaum et al., 2000~. Centers are now being asked to demonstrate these qualities in the new marketplace. For many community-based safety net providers, the advent of man- aged care has demanded a virtual re-creation of their legal, organiza- tional, clinical, and financial bases. Without much prior experience, pro- viders have been asked to assume direct and legal financial risks as part of their contractual relationships with MCOs. In some parts of the United States, this dramatic conversion has taken place at a very rapid pace, with potentially dire consequences for those that do not participate or that do not meet managed care's expectations (Darrell et al., 1995~. In seeking managed care contracts, CHCs have focused their efforts on developing alliances and networks,3 ranging from the "messenger 3As defined by the American Hospital Association, a network is a group of providers, insurers or community agencies that work together to coordinate a broad spectrum of ser- vices to their community. An alliance is a formal organization, usually owned by share- holders or members, that works on behalf of its individual members in the provision of services and products and in the promotion of activities and ventures ~Moscovice et aL, 1999~.

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138 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED model"4 organization for negotiating managed care contracts to full-risk MCOs. By 1998, more than 50 percent of CHCs nationwide participated in some kind of managed care provider network (Harrington et al., 1998~. Partnerships and networks are viewed as helping centers gain better ac- cess to self-paying patients covered by private insurance and financial resources, as well as affording them a greater chance to continue to serve existing Medicaid patients (Lipson and Naierman, 1996~. By diversifying the services that they provide CHCs view the potential of attracting a broader array of patients and funding streams (e.g., funds for public em- ployees, state corrections systems, and the State Children's Health Insur- ance Program). Joint ventures also help centers to invest as a group in information and quality monitoring systems, which are deemed essential tools for successful managed care contracting. Twenty-five CHC-owned health plans are in operation in 19 states; six have the largest slice of the Medicaid market in their communities (Rhoda Abrams, Health Resources and Services Administration, personal communication, December 1999~. Some of these CHC-owned plans and other aspects of CHCs and FQHCs are described in the following sec- tions. Community Health Plan of Washington One of the best known CHC-owned plans is the Community Health Plan of Washington (CHPW), with approximately 50 percent of its 140,000 members enrolled in Medicaid managed care (Nichols et al., 1997~. Ac- cording to Dennis Braddock, the plan's chief executive officer, formation of the plan "has brought a sense of security and financial stability to the participating centers" (Dennis Braddock, CHPW, interview, November 1998~. Unlike most other networks, the CHCs contract only with CHPW. According to Braddock, the plan has benefited the CHCs by assuming contractual risk, and savings are returned to the CHCs to expand and extend clinic operations and develop new facilities. The plan assumes risk for all but primary care services. CHPW contracts with non-FQHC clinics, but contracts with FQHCs for a majority of its enrollment (80 percent). Neighborhood Health Plan Another example of effective horizontal integration is the Neighbor- 4The messenger model is a method of setting fees for loose, non-risk bearing MCOs. A designated agent must act as a "messenger," shuttling individual physician information to the payer and vice versa. This method meets the criteria of antiturst laws that bar physi- cians from sharing any practice or fee information (Casualty Actuarial Society, 2000~.

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ADAPTING TO THE NEW ENVIRONMENT 139 hood Health Plan (NHP) in Massachusetts. NHP, which became opera- tional in 1988, is a licensed not-for-profit health maintenance organization (HMO) that serves most communities in the state. In partnership with 45 CHCs and other providers, NHP provides comprehensive health care and coverage to 107,000 members. As the largest Medicaid HMO in the state, NHP contracts with more than 140 subscriber groups representing a broad range of public- and private-sector businesses (Robert Master, Neighborhood Health Plan, Massachusetts site visit testimony, tune 1998~. Looking ahead at an increasingly competitive Medicaid environment, NHP became an affiliate of Harvard Pilgrim Health Cares in 1998 as a way of maintaining market share and adequate resources for infrastruc- ture development. Most of NHP's participating CHCs still are being paid on a primary care case management (PCCM) or capitated primary care basis. The leadership of NHP is encouraging some of the stronger CHCs to move to full capitation, in the belief that a community-based primary care infrastructure can be more cost-effective than hospital-based ambu- latory care. The issue of risk-taking was discussed during a committee site visit with executive directors of some of NHP's major participating community health centers.6 Several of the participants expressed con- cerns about assuming more risk and addressed the potential advantage of affiliating with a local hospital system that can help provide the needed capital for facility and system improvements. According to tackle lenkins Scott, executive director of Boston's Dimock Community Health Center, "Most CHCs work on small, or no margin. Under those circumstances if you make the wrong call, you are putting your constituency at risk" (Jackie Jenkins Scott, Dimock Community Health Center, June 1998~. Rural Health Care Group The challenge of adequately responding to today's more competitive environment with no or very limited cash reserves was underscored again during the committee's July 1998 site visit to the Rural Health Care Group, Incorporated (RHCG) in northeastern North Carolina. RHCG operates in a rural service area of 100,000 people, a quarter of whom use RHCG as 50n December 8,1999, the state of Massachusetts agreed to purchase Harvard Pilgrims seven medical centers for $147.6 million and then lease the centers back to the insurer. Harvard Pilgrim, which insures 1.2 million people in Massachusetts, Maine, and New Hampshire, had an estimated revenue loss of $100 million in 1999 qacob,1999~. 6Present at the June 24,1998, meeting were representatives from Dimock community Health center, Great Brook Valley community Health center, Greater New Bedford com- munity Health center, East Boston Neighborhood Health center, and the Massachusetts League of community Health centers.

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140 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED their primary care provider. In 1998 the center had a $10 million budget, with 76 percent of its patients receiving Medicare or Medicaid coverage; 16 percent being uninsured; and 8 percent having commercial coverage. lane McCaleb, medical director of RHCG, pointed out that the center's major problem was a lack of financial reserves, stating, "Our daily costs are $27,000, our reserves $4,000" (amounting to approximately two hours of operation in an emergency). Inadequate reserves and the inability to purchase needed technical assistance were inhibiting the center's ability to respond to the demands of a rapidly changing marketplace. "You can't afford to spend time or dollars to move in what may turn out to be the wrong direction," was a theme echoed at other committee workshops and site visits. Although the work of the Health Resources and Services Administration (HRSA) in providing technical assistance to CHCs was considered valuable, the committee heard extensive testimony on the im- portance to CHCs and other safety net providers of more personalized technical assistance specifically targeted to the special circumstances of local providers and their market environments. Primary Care Development Corporation As another part of its fact-finding, the committee conducted a work- shop in New York City, in January 1999, sponsored by The Common- wealth Fund. The committee heard a presentation on New York City's Primary Care Development Corporation (PCDC), a unique initiative that provides access to capital financing to increase the primary care capacity for medically underserved communities in New York City.7 PCDC pro- grams work from the principle that safety net providers must fundamen- tally change the way that they do business to survive in a more cost- competitive, less regulated market. Established in 1993 and supported with city, state, federal, and private-sector grants, PCDC has provided low-cost loans to 28 facilities and increased the primary care capacity so that health care can be provided for more than 700,000 patients. Each funded project also receives technical assistance. PCDC began developing technical assistance programs in 1997 and has found that "striking opera- tional improvements are possible even among the best providers." The underlying premises in the creation of PCDC were that primary care would be at the core of the new managed care delivery system and that primary care providers could sustain themselves through patient care revenues. An associated premise was that adequate payment rates would be developed for the effective and efficient delivery of care. All of 7Testimony of Ronda Koteichuk, executive director, PCDC.

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ADAPTING TO THE NEW ENVIRONMENT 141 these premises are now being questioned by PCDC as funded projects realize smaller and even negative margins and the risk of doing business becomes ever greater. The rising number of uninsured individuals in New York City is taking an added toll on providers and the vulnerable populations that they serve. PCDC showed preliminary evidence that uninsured individuals may be receiving less primary and preventive care as community-based ambulatory care providers operate under increasing fiscal pressures. CareOregon In Oregon, a group of safety net providers Oregon Health Sciences University, the Multnomah County Health Department (in Portland), and a number of CHCs formed CareOregon in 1994 to provide care for pa- tients in the Oregon Health Plan (OHP). CareOregon highlights some of the challenges of providing care to a disproportionate share of the high- risk patients in an environment of growing competition for Medicaid beneficiaries who are relatively healthy. CareOregon, which provides health care for 15 percent of the enrollees in the OHP, reports that it provides services to 50 percent of OHP's patients with human immuno- deficiency virus (HIV) infection or AIDS (Oregon Department of Admin- istrative Services, 1999~. Although a risk-adjusted payment methodology is beginning to be introduced, these reforms may not adequately compen- sate for the dramatically reduced Medicaid managed care reimbursement that the state's FQHCs now receive under Oregon's Section 1115 waiver, which no longer requires Medicaid or the plans with which it contracts to pay "reasonable" costs to FQHCs. In addition, belt-tightening measures have been introduced for OHP to compensate for the rising costs and declining cigarette tax revenues that help fund the plan. The cutbacks are reported to have had some negative spillover effects on safety net provid- ers such as CareOregon that find themselves with a weakening ability to care for those who remain uninsured (BNA's Health Care Policy Report, 1998~. Status of Community Health Centers Under Different Participation Strategies A Mathematica Policy Research study for HRSA looked at how FQHCs in eight national markets were faring under different participa- tion strategies, specifically in the areas of plan and network formation (Harrington et al., 1998~. Many of these efforts received start-up funds from the Bureau of Primary Health Care of the U.S. Department of Health and Human Services. Most plans and networks in the study were local in

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142 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED nature, reflecting historic affiliations of network providers facing the same market conditions; were not-for-profit organizations; and had at least seven members. The major findings were as follows. FQHCs opt to form plans to gain greater control of the funding stream and to potentially achieve greater savings, which requires them to take on greater risk. Many of the networks have a long-term goal of re- ducing their dependence on Medicaid enrollment and gaining Medicare and commercial contracts. There is an assumption that participating health centers will con- tribute substantial numbers of Medicaid enrollees to the network and manage costs effectively. In states that do not require participating plans to be licensed HMOs, networks are favoring a provider-sponsored organization (PSO)8 instead of an HMO strategy. PSO formation tends to be less capital inten- sive and is viewed as offering a more gradual transition to managed care. Furthermore, PSOs allow members to focus more on their provider role and mission of serving vulnerable populations. Some states have more limited entry requirements for PSOs compared to HMOs, which tends to make the PSO model attractive to providers. The more successful centers appeared to be those that are larger, have a secure market niche, are led by people with strong managed care expertise, are housed in adequate facilities and have solid operating and information systems, or are supported by strong local programs for vul- nerable populations. There are few hard rules on how centers should participate in man- aged care, but they cannot avoid participating at some level. All of the FQHCs were seeing more uninsured patients, reflecting increases in the number of both former Medicaid and now uninsured individuals and new uninsured patients. With growing numbers of unin- sured individuals, FQHCs will require continued and expanded support for uncompensated care to replace some of the disappearing cross-subsi- dies that in the past have helped support such care. The results of the Mathematica study suggest that FQHCs should give strong consideration to the inclusion of non-FQHC plans and pro- ~PSOs were created by the Balanced Budget Act of 1997 as a new way for providers to participate in both Medicare and Medicaid managed care programs. They are risk-bearing entities sponsored and operated primarily by providers that contract directly with Medi- care and Medicaid to deliver care to beneficiaries and are often referred to as "Safely Net Plans."

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148 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED in 1998 and (3) declining reimbursement from government payers (Rick Langfelder, Health and Hospital Corporation, personal communication, March 2000~. Many safety net hospitals in Texas are facing an uphill battle in adapt- ing to Medicaid managed care, given their inexperience in contracting with other plans, the growing competition for Medicaid patients, the stag- nant if not declining local funding for care for the indigent population, and the state's general lack of supportive policies for safety net providers. A recent report on Health System, a public hospital system in urban Bexar County, Texas (San Antonio), highlights both the promise and the prob- lems of the new funding environment (Begley et al., 1999~. In response to a more competitive market for Medicaid patients, the Health System has been moderately effective at restructuring and establishing a managed care HMO that serves both Medicaid and privately insured patients, as well as a managed care product for uninsured individuals. The level of enrollment in the Medicaid HMO has been below expectations, primarily because of competing PCCM plans that appear to be more attractive to potential enrollees. Lack of primary care providers is impeding the goal of offering uninsured individuals a place to receive regular medical care; most of these patients are still seen in clinics. State-imposed marketing restrictions were found to be another important factor limiting enroll- ment growth (Begley et al., 1999~. TennCare has had a major financial impact on Memphis, Tennessee's, leading public teaching hospital, the Regional Medical Center, colloqui- ally referred to as "The Med." Under TennCare, traditional safety net providers typically have not received any special consideration in man- aged care contracting (Gold, 1999~. In efforts to expand coverage, TennCare suspended disproportionate care hospital and graduate medi- cal education payments and reduced payments for Medicaid services. Although some of this funding was eventually restored, the temporary suspension of payment resulted in a loss of $20 million for the state's academic health centers in 1995 and a weakened ability to care for the indigent population (Meyer and Blumenthal, 1996~. The sudden and dramatic changes ("trial by fire") imposed by TennCare propelled The Med as well as the state's other academic health centers to develop strategies to deal with the challenges of reform and managed care. These strategies included the sale of clinical services through networking and product line development, reducing the costs of producing clinical services and of education and research, and improving community responsiveness and patient-customer services (Meyer and Blumenthal, 1996~. Despite some positive outcomes, Medicaid revenues for academic health centers declined dramatically and increased competi- tion has resulted in adverse selection (Gold, 1999~. As an example, deliv-

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ADAPTING TO THE NEW ENVIRONMENT 149 cries at The Med decreased from 8,000 to 4,000, and 3,500 of these were for high-risk pregnancies (Meyer and Blumenthal, 1996~. Safety Net Providers Operating in Rural Areas Although Medicaid managed care enrollment is growing at an explo- sive rate in other parts of the country, in many rural areas HMOs are still struggling to take root. A recent survey of Medicaid officials in all 50 states suggests that to date there is little evidence that HMOs can save money in rural markets (Slifkin et al., 1998~. Mandatory fully capitated programs appear to be less common in rural counties than in urban coun- ties (10 versus 23 percent) because of provider resistance, inadequate pro- vider supply, and other market dynamics. Rural communities are likely to have an undersupply rather than an oversupply of hospitals and phy- sicians. Some 237 rural community hospitals closed from 1981 through 1989; during the last 3 years of that period more than two-thirds of all community closures nationwide were in rural communities (Wysong et al., 1997~. Thus, although Medicaid HMOs have had their greatest im- pacts in cities by cutting expensive emergency department and inpatient hospital use, in rural areas without excess capacity, Medicaid patients often just forego care (Slifkin et al., 1998~. Many states, however, are determined to overcome these obstacles at least partially and have taken flexible approaches to implementing Med- icaid managed care in rural areas. Programs that work in metropolitan areas cannot simply be extended to rural markets without modification. The move to managed care is also being propelled by MCOs in neighbor- ing urban locations; in order acquire contracts with major employers, MCOs must be able to serve employees in all locations where the com- pany operates. Such inroads by large commercial plans, however, can pose a threat to the stability of fragile local delivery systems, particularly safety net providers (Wysong et al., 1997~. Most rural states have initially concentrated on developing PCCM and partial-risk models. The expansion of primary care management pro- grams has provided many patients with a place for regular medical care for the first time (Slifkin et al., 1998~. To overcome provider resistance to managed care, states like Arkansas and South Dakota have instituted temporary case management programs that pay doctors a $2 or $3 monthly fee per patient to oversee a patient's care and that reimburse doctors on a fee-for-service basis. Other states with large rural areas (e.g., Tennessee) are easing practice restrictions and are forming strategies to supplement a meager supply of rural family physicians with the use of registered nurses and midlevel providers. Looking at rural sites in 10 states, Mathematica Policy Research as-

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150 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED sessed the impact of managed care on rural health care providers serving low-income populations (Felt-Lisk et al., 1999~. The study found that the implementation of PCCM and captitated programs is feasible even in remote rural areas but that it takes more time for the programs to accom- modate to the rural health infrastructure and that they have increased difficulty in developing adequate networks. Most sites offered some pro- tections for safety net providers, primarily in the form of cost-based re- imbursement. Many providers changed their mix of services and staffing to become more efficient, maximize revenues, and better meet consum- ers' demands. The Mathematica Policy Research study suggests that the move to managed care in rural areas may be improving access to primary care and creating a healthy competition for Medicaid patients. In addition, the study includes some preliminary evidence that access to specialists and hospitals may have improved for Medicaid providers, however, they have experienced increased administrative responsibilities and costs as they transitioned to managed care, and any added fees have been offset by administrative burdens. The study found that rural safety net providers in Tennessee and Oregon were having to cut back on some staff and nonmedical services and that health departments at a number of the sites were cutting back on the provision of well-child services and other clini- cal services. Like other studies of rural safety net providers, the impact of capitated programs on providers had no clear patterns. Safety net provid- ers were both better and worse off depending on a combination of their market power, their proactive response, the protective payment policies available, the level of negotiated payment rates, and the specific charac- teristics of the state program. Local Health Departments The move to Medicaid managed care and competition for Medicaid patients by private providers and plans have placed many of the nation's 3,000 city and county public health agencies in a particularly vulnerable position (Martinez and Closter, 1998~. As more states opt for mandatory Medicaid managed care, the revenue stream for public health depart- ments is waning, compromising their ability to care for poor patients who do not qualify for Medicaid. In Washington, D.C., for example, where 15 publicly funded clinics once operated, only 5 remain. For LHDs, the move to mandated managed care has brought into sharp relief the role that Medicaid program expansions have played in redirecting the core activities if not the missions of many of these agen- cies. Over the years, the increased availability of Medicaid funds exacer- bated tensions and ambiguities that have long existed around the degree

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ADAPTING TO THE NEW ENVIRONMENT 151 to which (if at all) LHDs should provide direct clinical services and should move away from their traditional public health functions of epidemiol- ogy and surveillance. Like other core safety net providers, LHDs have always been precariously funded, depending largely on federal, state, and local grants together with local government tax revenues. The growth in Medicaid eligibility and benefits provided incentives for many LHDs to increase their presence in direct services delivery, particularly primary care and care for special-needs populations such as individuals with HIV infection or AIDS and other infectious diseases. In many of the southern states with poor Medicaid programs or a dearth of participating provid- ers, LHDs have long been major players in direct services delivery and are a critical component of these communities' health care safety nets (Long and Marquis, 1998~. These public health agencies have proven to be well adapted to meeting the complex needs of populations that have cultural, language, educational, and other differences, such as minority and immigrant populations (Brumback and Malecki, 1996~. State Medicaid contracts generally encourage health plans to form relationships with a wide variety of public health agencies, including school-based health clinics, providers of health care for homeless people, and other providers of special services. Rarely, however, do states set specific requirements for comprehensive involvement of LHDs. Some state contracts are more likely to spell out a role for LHDs on a service-by- service basis, particularly for infectious diseases. In California, for ex- ample, the state contract specifies that patients with tuberculosis who require directly observed therapy be referred to the LHD (Zuckerman et al., 1998~. For the most part, however, contracts are vague and lack clarity with respect to how health departments might be paid for services ren- dered, and primary responsibility for services formerly provided by health departments has shifted to managed care providers (Alpha Center, 1998; Rosenbaum et al., 1998~. As mandated Medicaid managed care continues to make inroads, public health departments are developing three distinct strategies for the creation of partnerships with MCOs, strategies that may allow them to survive and thrive in the new environment (Martinez and Closter, 1998~. One strategy is to coordinate patient services and information between health departments and Medicaid managed care plans. For example, the Onondaga County Health Department (OCHD) in Syracuse, New York, established a memorandum of agreement with four LHDs for an inte- grated system of public health and managed care services. OCHD is reim- bursed by the health plan for the population-based surveillance. Another strategy, used by Denver Health in Denver, Colorado, as well as a num- ber of private plans, is to integrate traditional public health functions such as health promotion and disease prevention into their managed care plans.

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152 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED A third strategy establishes formal systems of reimbursement for health departments and other essential community providers that are part of a managed care plan's benefits package. For example, Medicaid managed care contracts in New York City allow the LHD to provide certain screen- ing services for which the health plan is required to pay. Other Special Service Safety Net Providers Other special service safety net providers (e.g., family planning clin- ics, school-based centers, not-for-profit visiting nurse associations, and public dental clinics) are generally experiencing much greater difficulty obtaining managed care contracts because they are not able to meet some of the key contracting provisions of managed care related to staffing and coverage. For example, under most state laws, provider groups seeking managed care contracts must prove their ability to offer a full range of primary care services and 24-hour care, a difficult hurdle for many special . . service provlaers. A survey of community-based safety net organizations, primarily spe- cial service providers operating in Connecticut, offers some interesting perspectives (Grogan and Gusmano, 1999~. Two-thirds of the safety net providers that responded to the survey said that they were participating in the state's Medicaid managed care program. The circumstances under which these organizations are participating vary widely, and this varia- tion extends to how they are reimbursed (e.g., capitation versus fee-for- service) as well as the relative adequacy of the payment rates that they receive. The survey found that having favored legal status under the state's managed care laws does not automatically guarantee managed care contracts or adequate reimbursement. The study's most important finding points to the general lack of information that a state like Connecti- cut has about how safety net providers are responding to system changes and how these changes are affecting the care of Medicaid and uninsured patients. NEW FEDERAL SAFETY NET INITIATIVE As a way to foster further innovation and integration among safety net providers, the Clinton Administration's fiscal year 2000 budget re- quest included a 5 year $1 billion safety net initiative to provide local community grants that would enhance collaboration and cooperation as well as innovation and greater efficiency among safety net clinics and hospitals. A major objective of the initiative is to assist communities and their safety net providers in developing integrated health care delivery systems that serve the uninsured and underinsured populations with

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ADAPTING TO THE NEW ENVIRONMENT 153 greater efficiency and improved quality of care. The budget request in- cluded $25 million as seed funding for fiscal year 2000 and $250 million per year for each of the next 4 years to finance reforms to the health care safety net in up to 100 communities around the country. The $25 million seed money for providing health care for the uninsured and underinsured populations has been appropriated under the FY 2000 U.S. Department of Health and Human Services Appropriations Act. The new program the Community Access Program will be administered by HRSA (Fox, 2000~. IMPORTANCE OF STATE AND LOCAL POLICIES Whatever strategies and adaptive mechanisms safety net providers develop, state policies and the regulatory environment will ultimately determine whether these survival strategies succeed or falter. Safety net plans, particularly on the ambulatory care side, tend to be thinly capital- ized, heavily reliant on Medicaid with little ability to shift costs, and relatively small in size (less than 40,000 members). They also often lack the brand-name recognition of larger commercial plans. Although some hospitals may have deeper pockets and more resources for infrastructure improvement, their legal commitment to care for the uninsured popula- tion and the community's reliance on them for high-cost, low-margin tertiary-care services place these mission-driven institutions in a poor position to compete successfully in a highly competitive, price-driven environment. Within this framework, the environment and political-so- cial culture in which safety net providers operate remain critical factors. A growing number of states are fostering contracts between plans and traditional providers (Kaye et al., 1999~. A 1998 survey by the Na- tional Academy of State Health Policy found that Medicaid agencies are more likely to encourage plans to contract with traditional providers than they are to require them to do so. The survey found that states are most likely to require plans to contract with FQHCs and encourage but not require contracts with other traditional providers (Kaye et al., 1999~. Most of the states studied by the Urban Institute's Assessing the New Federalism program have included special measures in the Medicaid managed care initiatives that are aimed at encouraging commercial health plans to include safety net providers in their networks or facilitating the creation of managed care plans centered on safety net providers (Coughlin et al., 1998~. Minnesota requires all plans that serve Medicaid beneficia- ries to include FQHCs, rural health centers, and LHDs in their networks. California, Michigan, Florida, New York, and Washington award bonus points to the bids of managed care plans when they contract with safety net providers. New lersey and Massachusetts encouraged safety net pro- viders to form their own plans and sought Section 1115 waivers to seek

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154 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED exemption from the 75/25 enrollment requirement.l Other states pro- vide incentives to MCOs to contract with safety net providers by requir- ing that health plans meet specific access criteria (e.g., geographic pri- mary care availability) or service criteria (e.g., family planning, targeted case management, and the provision of enabling services) that safety net providers are especially well-qualified to deliver. Some states have used automatic enrollment and automatic assignment policies to help the par- ticipation of safety net providers in managed care arrangements. For ex- ample, in California's Two-Plan model managed care initiative Medicaid beneficiaries who do not choose a plan are automatically enrolled in the "local initiative" safety net provider plans. Regardless of state incentives and requirements, many health plans recognize the unique value of con- tracting with safety net providers as part of their strategy to increase market share. Given the ongoing evolution and diversity of local health care mar- kets, it is difficult to come to any definitive conclusions regarding the priority strategies that safety net providers will need to pursue to succeed in the new environment. As part of its research, expert hearings, and meetings with key officials, the committee developed and field tested a list of characteristics and capabilities that are viewed as necessary for safety net organizations to succeed in today's challenging environment (see Box 4.1. It was clear that successful adaptation goes well beyond simply participating effectively in managed care. Like any other success- ful health care enterprise, the successful safety net provider needs excel- lent leadership, financial viability, community support, patient-focused quality care, the ability to diversify its funding streams, and access to capital. In summary, most safety net providers are developing or participat- ing in a variety of managed care programs, including networks, affilia- tions, or stand-alone managed care programs, to compete effectively in the Medicaid managed care arena. Overall, these providers are experienc- ing some success in obtaining risk-based contracts. Many safety net pro- viders are making concerted efforts to assume broader risk, negotiate 1OThe 75/25 rule, which required that 25 percent of a plan's enrollment be privately insured, was waived by the BBA of 1997 and replaced with a number of required managed care safeguards that states must build into their programs if they are to receive federal funding (see Chapter 1~. 1lThe committee developed the information contained in Box 4.1 through a deliberative process using the literature, expert hearings, and regional testimony. In each case, a list of common factors was developed and field tested to establish content validity in consultation with key informants from across the nation representing safety net providers, MCOs, and state and local authorities.

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ADAPTING TO THE NEW ENVIRONMENT 155

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156 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED more favorable capitation rates, aggressively preserve their Medicaid base, and establish revenue replacement strategies. The ease or difficulty in achieving these objectives appears to be closely related to the state in which these providers operate, the design of the Medicaid program, and the types of Medicaid populations covered by mandatory enrollment (Norton and Lipson, 1998~. However, virtually across the board, safety net providers are seeing more uninsured patients while at the same time they are experiencing a decrease in overall levels of reimbursement, in the number of people eligible for Medicaid, and in the subsidies that have helped finance care for indigent populations. Whether in the future safety net providers can respond to the new market requirements and achieve a viable balance between margin and mission may ultimately determine whether poor people in the United States continue to receive access to health care. REFERENCES Alpha Center. 1998. Medicaid Managed Care and Safety Net Providers: A Technical Assistance Guidefor Managed Care Organizations. Princeton, NJ: Center for Health Care Strategies, Inc. Baxter, R., and Mechanic, R. E. 1997. The Status of Local Health Care Safety Nets. Health Affairs, 16~4), 7-23. Begley, C., Setzer, J., Lairson, D., Masotti, P., Ribble, J., De Nino, L., and McCandless, R. 1999. Strategies of a Public Hospital System Under Medicaid Managed Care. Princeton, NJ: Center for Health Care Strategies, Inc. BNA's Health Care Policy Report. 1998. Losses Driving Some Managed Care Organizations Out of Medicaid. BNA's Health Care Policy Report, 6~39), 1579-1582. BNA's Health Care Policy Report. 1999. City Public Hospitals Project Deficit from Medicaid Managed Care Revenue Drop. BNA's Health Care Policy Report, 7~12), 516. Bovbjerg, R., and Marsteller, J.1998. Health Care Market Competition in Six States: Implications for the Poor. Paper No. 17. Washington, DC: The Urban Institute. Brumback, C., and Malecki, J. 1996. Health Care Reform and the Role of Public Health Agencies. Journal of Public Health Policy, 17~2), 153-169. Bureau of Primary Health Care. 1998. Uniform Data System. Bethesda, MD: Bureau of Primary Health Care/Health Resources and Services Administration, U.S. Department of Health and Human Services. Casualty Actuarial Society. 2000. Glossary of Terms in Managed Health Care [WWW docu- ment]. URL: http://www.casact.org/health/glossary.htm (accessed March 20, 2000~. Conover, C.J., and Davies, H.H. 2000. The Role of TennCare in Health Policy for Low-Income People in Tennesse. Occasional Paper No. 33. Washington, DC: The Urban Institute. Coughlin, T., Wiener, J., Marsteller, J., Stevenson, D., Wallin, S., and Lipson, D. 1998. Health Policyfor Low-Income People in Wisconsin. Washington, DC: The Urban Institute. Darnell, J., Rosenbaum, S., Scarpulla-Nolan, L., Zuvekas, A., and Budetti, P. 1995. Access to Care Among Low-Income, Inner-City, Minority Populations: The Impact of Managed Care on the Urban Minority Poor and Essential Community Providers. Washington, DC: Center for Health Policy Research, The George Washington University. Feldman, R., Baxter, R., and Omata, R. 1997. Staying in the Game: Health System Change Challenges Caring for the Poor. Fairfax, VA: The Lewin Group.

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ADAPTING TO THE NEW ENVIRONMENT 157 Felt-Lisk, S. 1999a. The Changing Medicaid Managed Care Market: Trends in Commercial Plans' Participation. Washington, DC: The Henry J. Kaiser Family Foundation. Felt-Lisk, S. l999b. The Changing Medicaid Managed Care Market: The Characteristics and Roles of Medicaid-Dominated Plans. Washington, DC: Mathematica Policy Research, Inc. Felt-Lisk, S., and Yang, S. 1997. Changes in Health Plans Serving Medicaid, 1993-1996. Health Affairs, 16(5), 125-133. Felt-Lisk, S., Silberman, P., Hoag, S., and Slifkin, R. 1999. Medicaid Managed Care in Rural Areas: A Ten-State Follow-up Study. Health Affairs, 18~2), 238-245. Fox, C.E. 2000. Availability of Funds for Grants for the Community Access Program (DOCID: fro4feO0-99) [WWW document]. URL: http://. wais.access.gpo.gov (accessed March 13, 2000~. Gabow, P. 1997. Denver Health: Initiatives for Survival. Health Affairs, 16~4), 24-26. Gold, M. 1999. Insight from Oregon and Tennessee: The Influences of State Context on Medicaid Initiatives and Health Care for Low-Income Populations. Pp. 199-221. In: Access to Health Care: Promises and Prospects for Low-Income Americans, M. Lillie-Blanton, R.M. Martinez, B. Lyons, and D. Rowland (eds.~. Washington, DC: The Henry J. Kaiser Family Foundation. Gold, M., Sparer, M., and Chu, K. 1996. Medicaid Managed Care: Lessons from Five States. Health Affairs, 15~3), 153-166. Gray, B., and Rowe, C. 2000. Safety-Net Health Plans: A Status Report. Health Affairs, 19~1), 185-193. Grogan, C., and Gusmano, M. 1999. How Are Safety-Net Providers Faring Under Medicaid Managed Care? Health Affairs, 18~2), 233-237. Harrington, M., Frazer, H., and Aizer, A. 1998. Medicaid Managed Care and FQHCs: Experi- ences of Plans, Networks and Individual Health Centers. Washington, DC: Mathematica Policy Research, Inc. Hawkins, D., and Rosenbaum, S. 1998. The Challenges Facing Health Centers in a Chang- ing Healthcare System, pp. 99-122. In: The Future U.S. Healthcare System: Who Will Care for the Poor and Uninsured? Altman, S., Reinhardt, U., and Shields, A. (eds.~. Chicago, IL: Health Administration Press. Hoag, S., Norton, S., and Raj an, S. 1999. Effects of Medicaid Managed Care Demonstrations on Safety Net Providers in Hawaii, Rhode Island, Oklahoma, and Tennessee. Princeton, NJ: Mathematica Policy Research, Inc. Holahan, J., Zuckerman, S., Evans, A., and Rangaraj an, S. 1998. Medicaid Managed Care in Thirteen States. Health Affairs, 17~3), 43-63. Horvath, J., Kaye, N., Pernice, C., and Mitchell, E. 1997. Medicaid Managed Care: Program Characteristics and State Survey Results, Vol. 1. Washington, DC: Congressional Research Service/The Library of Congress. Hurley, R., and McCue, M. 1998. Medicaid and Commercial HMOs: An At-Risk Relationship. Princeton, NJ: Center for Health Care Strategies, Inc. Iglehart, J. K. 1995. Health Policy Report: Medicaid and Managed Care. New England Journal of Medicine, 332~25), 1727-1731. Jacob, J. 1999. Massachusetts Bailing Out Health Plan. American Medical News, 42~48), 13-14. Kalkines, Arky, Zall and Bernstein, LLP. 1998. Safety Net Plans: The Role of Provider-Sponsored Health Plans in Maintaining the Safety Net in a Managed Care Era. New York, NY: United Hospital Fund. Kaye, N., Pernice, C., and Pelletier, H. (eds.~. 1999. Medicaid Managed Care: A Guidefor States, 4th ed. Portland, ME: National Academy for State Health Policy. Lagnado, L. 1997. Inner-City Hospital Begs for Life Support. The Wall Street Journal, Febru- ary 12, pp. B1-B2.

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