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Background And OVQNIQW BACKGROUND A more competitive health care marketplace, changing federal poli- cies, Revolution of more responsibility to state and local governments, and the move to managed care have produced major changes in the financing and delivery of health care. An increasingly price-competitive environment has placed a greater premium on market share and has given hospitals and other providers strong incentives to merge and con- solidate. Fee-for-service insurance is rapidly being replaced by systems of prepayment and risk-based capitation. There has been explosive growth in enrollment in managed care organizations. Between 1984 and 1993, the proportion of employees enrolled in health maintenance organizations (HMOs) increased from 5 to 50 percent. By 1998, 85 percent of employees with health insurance coverage were enrolled in some form of managed care (Kuttner, 1999~. Ongoing pressures from government and private purchasers to make the system more cost-effective and efficient have shown some success. In 1997 health care spending rose a mere 4.8 percent, the slowest increase in nearly 40 years (Employee Benefit Research Insti- tute, 1999~. The move to a new business paradigm for health care has unfolded against an increasingly troubling background a rising number of un- insured Americans. In 1987, 31.8 million nonelderly Americans were un- insured. By 1998 this number had risen to 43.9 million, a 38 percent 16

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BACKGROUND AND OVERVIEW 17 increase (Fronstin, 2000~. In 1998, 18.4 percent of the total nonelderly population lacked insurance. Growth in the ranks of the uninsured is occurring at a time when many of the major direct and indirect subsidies that have been critical to the financing of care for poor and uninsured patients are being restricted or are scheduled to be phased out. Although the care for these patients varies widely from state to state and even from community to community, responsibility for that care has in the past been shared by a broad array of hospitals, providers in outpatient care settings, and private physicians. In many communities a disproportionate share of the responsibility, how- ever, has traditionally been sustained by a subset of public hospitals, teaching hospitals, community-based clinics, local health departments, and a discrete number of other institutions. Collectively, these organiza- tions are known as the "health care safety net." Although the demand for free or discounted care is rising, the ability of the safety net to respond to the growing numbers of uninsured individuals is showing signs of deep- ening stress and some erosion (Kalkines, Arky, Zall and Bernstein, LLP, 1998; Baxter and Feldman, 1999~. The increasing demands on safety net providers are being propelled in part by a reduction in the level of un- compensated care previously provided by non-safety net institutions and private practitioners (Cunningham et al., 1999; Mann et al., 1995~. America's health care safety net is a patchwork of providers, funding, and programs tenuously held together by the power of demonstrated need, community support, and political acumen. The safety net has never been particularly safe or secure, but changes in the current health care system in combination with rising numbers of uninsured may be placing the nation's health care safety net at a new level of risk. In light of these trends, the U.S. Department of Health and Human Service's (DHHS's) Health Resources and Services Administration (HRSA) asked the Institute of Medicine (IOM) to undertake an 18-month study to: examine the impact of Medicaid managed care and other changes in health care coverage on the future integrity and viability of safety net providers operating primarily in ambulatory and primary care settings. To conduct the study, a committee of 14 experts was selected and carefully formulated to reflect a balance of expertise particularly relevant to its charge.1 The committee met six times between December 1997 and April 1999; its deliberations and fact-finding activities included site visits, regional meetings, structured interviews, and commissioned papers. Biographical sketches of the committee can be found in Appendix A.

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18 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED APPROACH TO THE STUDY Five tasks framed the committee's charge: First, to review and synthesize the evidence-based, peer-reviewed literature as well as other relevant articles and publications as they per- tain to the major areas of the committee's scrutiny; Second, to guide, develop, and convene an expert hearing and workshop to highlight the leading research, policy, and model programs in this arena to assess what is known (or not known) about the current and projected status of safety net providers and the populations they serve; Third, to conduct two to three regional site visits to learn firsthand how various issues and policies related to the changing status of safety net providers are affecting the providers, administrators, and constituen- cies most directly involved in the day-to-day operations of safety net delivery systems; Fourth, to commission background papers on issues important to the committee that might not be adequately addressed in the expert hear- ing, workshop, and site visits; and Fifth, to produce a final report of the committee's findings, conclu- sions, and recommendations. The committee conducted site visits and structured interviews in Tampa, Florida; Boston, Massachusetts; and rural North Carolina. During the course of the study, additional funding from the California Healthcare Foundation and The Commonwealth Fund made it possible for the com- mittee to conduct two major regional meetings: in Oakland, California in December 1998, and in New York City in lanuary 1999. The site visits and regional meetings helped inform the committee about important varia- tions among states. These variations exist in both the organization and the strength of the safety net and in the adaptive strategies being developed to respond to Medicaid managed care. The accumulated evidence from the literature, expert workshop, and regional site visits suggested four areas in need of more in-depth explora- tion: (1) special safety net issues for rural providers, (2) a better under- standing of the parallel issues in behavioral health, (3) an analysis and lessons learned from the Medicaid DSH program, and (4) an assessment of data resources and information gaps. To gain more specific knowledge on these topics, the committee commissioned four background papers: The Changing Market, Managed Care and the Future Viability of

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BACKGROUND AND OVERVIEW 19 Safety Net Providers Special Issues for Rural Providers, by T.C. Ricketts, R.T. Slifkin, and P. Silberman, 1998. Behavioral Health Community Providers' Response to Managed Care, by G.K. Robinson, G.T. Bergman, S.E. Crow, and L.r. Scallet, 1998. Issues in Designing a Fund for Safety Net Providers, by A. Schneider and M. Spivey, 1999. Understanding the Role and Future Viability of Safety Net Pro- viders: Data Resources and Information Gaps, by A.E. Shields. The paper by Ricketts and colleagues was used as background for Chapter 2 on the structure and diversity of the safety net, and the one by Robinson and colleagues was used as background for Chapter 6 on special- needs populations. The third paper by Schneider and Spivey helped inform the committee's thinking about the design of future funding and policies targeted to helping providers who care for a disproportionate number of poor and uninsured patients. The fourth paper by Shields was used as background for Chapters 3 and for the committee to gain a better under- standing of the special challenges associated with obtaining reliable, com- parable, and timely data to assess and monitor the impact of the changing health care market on safety net providers. In addition, the report includes two original figures developed by the committee: Safety Net Providers: Keys to Successful Adaptation and Future Viability in a Managed Care Environment (Box 4.1, p. 155) Characteristics of Medicaid Managed Care That Make It Different from Commercial Managed Care (Box 5.1, pp. 161-162~. With supplementary funding from HRSA, the committee was able to commission a number of analyses to address some important information gaps, including the following: An analysis of national (American Hospital Association) hospital data (1991 to 1996) to ascertain whether greater price competition in the hospital market was leading to an increasing concentration of uncompen- sated care within the 100 largest metropolitan statistical areas at the same time as Medicaid revenues to these hospitals were declining. Reports from representatives of safety net hospitals at the committee's public hear- ing and site visits offered testimony indicating that the above phenom- enon was taking place. An independent analysis of the most recent (1997) Uniform Data System (UDS), the annual reports required by HRSA of all federally quali- fied health centers (FQHCs),2 to assess changes in the patient and payer

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20 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED mixes of these centers. During the later stages of the present study, 1998 UDS data became available for analysis and are discussed in Chapter 3 of this report. A national survey of local health departments to gain a better understanding of how they are responding to the new requirements of managed care. ORGANIZATION OF THE REPORT The report is divided into seven chapters: The remaining sections of Chapter 1 include a description of the committee's key definitions, study parameters, and caveats. In addition, for readers who may not have the time to read the report cover to cover, this chapter offers a summary of the major program and policy issues that form the context of this study. These issues are covered in greater detail in other chapters of this report. Chapter 2 includes an overview and brief history of the nation's major safety net systems, including their relative roles and importance, their patient and payer mixes, and their unique characteristics. This chap- ter also describes the chief structural characteristics of safety net systems. Chapter 3 provides the latest data on current forces affecting changes in the demand for, the support of, and the structures and envi- ronments of safety net systems. It also provides an assessment of the adequacy and gaps in current data systems. Chapter 4 reviews the data on how various safety net systems are responding to the changing market and what adaptive mechanisms are most critical to success. Chapter 5 reviews the literature on how the move to Medicaid managed care and other changes are affecting populations traditionally served by safety net systems. Chapter 6 examines the impact of Medicaid managed care on special- needs populations. Four groups (children with special needs, people with serious mental illness, people with HIV/AIDS, and people who are home- less) are used to highlight the literature and the experiences of the states in implementing Medicaid managed plans for these populations. Chapter 7 presents the committee's findings and recommendations. 2FQHCs qualify for Medicaid cost-based reimbursement and receive federal Section 330 grant funds under the Public Health Service Act. They include traditional community health centers, migrant health centers, Health Care for the Homeless Programs, and Public Hous- ing Primary Care Programs (see Chapter 2~.

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BACKGROUND AND OVERVIEW KEY DEFINITIONS, STUDY PARAMETERS, AND CAVEATS IOM Definition of Safety Net Providers and Core Safety Net Providers 21 Even though the United States is a nation with vast riches and enor- mous wealth, it has failed to assure timely and effective access to health care for many populations. For some, the primary barrier is the lack of insurance. For other low income patients who may have insurance, there often remain serious barriers to care because of inadequate coverage, or non-financial impediments related to culture, education, transportation, language differences, homelessness, immigrant status, or difficult health problems (e.g., substance abuse, mental illness, HIV/AIDS). In this study, the IOM committee focuses on the health care problems of these "vulner- able populations" (i.e., uninsured individuals, underinsured individuals with low incomes, Medicaid recipients, individuals residing in medically underserved areas, and patients with special needs3 ~ who are most at risk in our fragmented health care delivery system. The institutions and professionals that by mandate or mission deliver a large amount of care to uninsured and other vulnerable populations are often referred to as "safety net providers." During its various delibera- tions, workshops, and site visits, the committee observed a general lack of agreement and ongoing debate on which providers constitute the health care safety net. In the absence of a universally accepted definition of the safety net, for the purposes of this study the IOM committee defines safety net providers as Those providers that organize and deliver a significant level of health care and other health-related services to uninsured, Medicaid, and other vulnerable patients. In most communities, there is a subset of the safety net that the com- mittee describes as "core safety net providers." These providers have two distinguishing characteristics: (1) by legal mandate or explicitly adopted mission they maintain an "open door," offering access to services to patients regardless of their ability to pay; and (2) a substantial share of their patient mix is uninsured, Medicaid, and other vulnerable patients. By "substantial" the committee means providers who have a high 3Patients with special needs are people with serious chronic illnesses or disabilities as well as those who have experienced social dislocation E.g., homelessnessy. Special needs populations are discussed in Chapter 6 of this report.

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22 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED market share of uncompensated care and high commitment to such care as demonstrated by its ratio of uncompensated care to its total payer mix. These core safety net providers typically include federal, state, and locally supported community health centers (CHCs) or clinics, public hos- pital systems, and local health departments. In some communities they also include mission-driven teaching hospitals, community hospitals, and ambulatory care clinics (which are often located in central city areas or which serve as the sole provider of health care in the community). The committee discussed at length the desirability and feasibility of identifying a specific threshold or percentage of care to the uninsured that would have to be met before a clinic, hospital, or practitioner could be classified as a "core" safety net provider. During the course of its work, however, the committee was struck by the wide variations that exist across the country in (1) the demand for safety net services as measured primar- ily by the number of uninsured persons in a community, (2) the composi- tion of the safety net and the concentration of care to the poor and unin- sured, and (3) the market, political, and social environment in which local safety net providers operate. A review of the literature indicates that "there is no such things as an official health care safety net" (Rovner, 1996~. An attempt to quantify safety net or disproportionate share pro- viders for the purpose of Medicaid DSH funding has not guaranteed that funds are well targeted or allocated (Coughlin and Liska, 1998; Schneider and Spivey, 1999~. Part of the problem has been the lack of accurate data on where uninsured people receive their care. Given these findings and observations, the committee determined that it was inadvisable, if not impossible, to set a specific threshold that would be meaningful or relevant for all communities. There was a con- sensus that core safety net providers are those providers in a community whose disappearance would most hurt the poor and uninsured popu- lations. Some questioned whether Medicaid patients should be included in the committee's definition of "vulnerable populations," given their access to insurance coverage. The committee unanimously agreed to include Medicaid patients as "vulnerable" given historic concerns about payment rates to providers, the highly unstable and categorical nature of Medicaid coverage, the low socioeconomic status of Medicaid beneficiaries, and their often more complex health care needs. Moreover, the federal gov- ernment identifies the uninsured and Medicaid beneficiaries as the two principal groups to be at high risk for medical underservice (Rosenbaum et al., 2000~. In defining "core safety net," the committee considered whether to limit its definition to only those providers who are legally mandated to care for uninsured patients and other vulnerable populations. Although this

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BACKGROUND AND OVERVIEW 23 definition is often used, the committee, in its hearings and analysis of the data, came to recognize that in some communities, mission-driven hospi- tals, health care systems, clinics, and individual providers provide a sub- stantial amount of such care, even though they are not legally mandated to serve these groups. For example, Detroit does not have a public hospital. The uninsured population in that city seeks inpatient and emergency room care primarily from Detroit Medical Center, a nonprofit academic medical center. In Milwaukee the public hospital Cohn Doyne) closed and the burden for taking care of the uninsured is shared among all hospitals. With the closing of John Doyne, a primary care delivery network was developed, anchored by a network of CHCs and clinics. These clinics act as gatekeepers for the provision of hospital care. California gives counties significant discretion in determining their local safety net system. Los Angeles has built up a large public system of hospitals and clinics that, until recently, has not tried to partner with private providers in the county (Zuckerman et al., 1998~. In contrast, San Diego County has no county-run hospitals or primary care clinics. Instead, the county contracts with private-sector, nonprofit groups to provide care for the indigent population. The county takes the role of catalyst rather than fonder in the public-private collaboration (Zuckerman et al., 1998; California regional meeting testimony to the IOM committee, 1998~. In addition to New York City's Health and Hospital Corporation, the nation's largest public hospital system, 33 designated financially dis- tressed and voluntary supplementary low-income patient adjustment (SLIPA) hospitals serve disproportionately large numbers of Medicaid and uninsured patients.4 Although voluntary SLIPA and financially dis- tressed hospitals represent less than one-fifth of the state's nonpublic hospitals, they account for 27 percent of all self-paying discharges and 48 percent of all Medicaid discharges delivered outside public hospitals (Kalkines, Arky, Zall and Bernstein, LLP, 1999~. The committee gives core safety net providers particular attention because they are likely to be more directly affected by increases in the number of uninsured, changes in Medicaid policies, and reductions in funding for programs that support care for poor and uninsured popula- tions. Their narrow base of paying patients makes it difficult for these providers to shift expenses for uninsured patients to other payers. More- over, their dependence on Medicaid revenues and federal, state, and local subsidies exposes these providers to exceptional financial risk if Medicaid payment levels are further reduced, if Medicaid patient volumes decline, Seventeen percent of New York state s residents lack coverage compared to a 50 state average of 15.6 percent. Almost one-half of New York city s population is either on Medic- aid or uninsured.

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24 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED or if other sources of direct or indirect support (e.g., disproportionate share hospital [DSH] payments and cost-based reimbursement for feder- ally qualified health centers [FQHCs]) are reduced. Traditionally, core safety net providers have served as the default health care system for poor and vulnerable populations. Even if universal health care coverage is someday realized, certain isolated and disadvan- taged populations will continue to face significant barriers to care, includ- ing demographic, linguistic, cultural, racial, geographic, and organiza- tional barriers (Darrell et al., 1995; Rosenbaum et al., 2000~. In many communities a substantial proportion of care for uninsured and vulnerable populations is provided by private physicians and institu- tions such as academic medical centers and not-for-profit hospitals not included in the committee's definition of the core safety net. In aggregate, these providers may deliver the majority of care for vulnerable popula- tions in a community, and the committee recognizes their importance in assuring some level of access for many patients (Cunningham and Tu, 1997; Mann et al., 1997~. These providers are not the focus of this report because the uncompensated care they provide to vulnerable populations represents a small share of their patient mix, and they have historically been able to absorb or cover these expenses by shifting the costs to other payers. However, given the growth of managed care, the increased com- petitiveness in the health care marketplace, and the pressures resulting from the Balanced Budget Act of 1997, the willingness and ability of many of these providers to continue their commitment to charity care may become impaired, placing even more pressure on a community's safety net (see Chapter 3~. The committee recognizes the complex dynamic that exists within a community among all of the providers that serve uninsured and other vulnerable populations. Visually, it may be helpful to picture this dynamic as several layers or "rings" around a central core. The relative size, patient care contribution, and organization of providers in each segment differs greatly from community to community. The current finite capacity, ability, or willingness of each ring or subset of providers to care for those with no or inadequate coverage makes this relationship strongly interdependent. The stability of the overall safety net is dependent on maintenance of effort of each of the segments, that is, if the core or the rings were to be significantly disrupted, the entire safety net would be in danger of com- ing apart. For example, without core safety net providers in many com- munities, other providers that serve the uninsured and other vulnerable patients may be unwilling or unable to assume the burden of caring for substantially larger numbers of patients. Conversely, the core safety net with its limited capacity and patchwork funding depends on the ongoing contribution of care to uninsured and other vulnerable patients made by

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BACKGROUND AND OVERVIEW 25 the larger subsets of other community providers. This picture is further complicated by competition between providers in the core and rings for segments of the Medicaid population (e.g., healthy pregnant women) and, in some cases, for uninsured patients in communities where subsidies that support such care (e.g., uncompensated care pools and indigent care programs) are available. Study Parameters and Caveats The committee considered its work and statement of task at its first meeting in December 1997. As part of that discussion, the committee set some parameters and caveats regarding its work agenda. Emphasis on Providers In looking at the effects of the changing environment on the nation's health care safety net, the committee acknowledged that the ultimate goal must be to assess whether the needs of the communities and populations served by these providers are adequately met. However, these patients are served by providers, and in keeping with its charge, the committee focused its attention on the changing financial and organizational status of safety net providers, particularly core safety net providers. Neverthe- less, the committee believes strongly that the future of these safety net providers in a more competitive marketplace will and should depend on whether the populations traditionally served by them will continue to choose these providers under conditions of enhanced choice. If over the long term, Medicaid patients become more attractive to the broader and more competitive health care market, safety net providers accustomed to a captive patient population may find themselves having to improve ser- vices or else lose their patient base and financial viability. Community and Institutional Providers Although the committee understood that the study's sponsor was particularly interested in community-based ambulatory care providers that fall under its funding authority, the committee and sponsor recog- nized that an accurate assessment of the role and future viability of these providers would have to include other important contributors to in- and outpatient care for vulnerable populations. These include public hospi- tals, local health departments, and clinicians working as a group or indi- vidually with demonstrated commitment to serving poor and uninsured populations.

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26 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED Special-Needs Populations The report devotes a chapter (Chapter 6) to the impact of Medicaid managed care on special-needs populations served by safety net pro- viders. These populations are considered particularly medically and eco- nomically vulnerable and help highlight a number of the challenges in the expansion of Medicaid managed care beyond the Aid to Families with Dependent Children/Temporary Assistance to Needy Families popu- lation. Expanded Choice of Providers "Mainstreaming" (i.e., offering beneficiaries a choice of providers from beyond the core safety net) often is cited as a goal in extending managed care to vulnerable populations. The committee voiced concern that the concept of mainstreaming conveys certain values that may not reflect reality. Mainstream plans and providers may automatically be viewed as offering better care; that is, they are in the mainstream rather than at the margin or the periphery. During its fact-finding activities, the committee came to realize that Medicaid-dominated plans or safety net plans may be structured in ways that better meet the often complex health care needs and cultural diversity of vulnerable populations. In addition, Medicaid-dominated plans may be more likely to include providers that also serve the uninsured. Rather than the goal of mainstreaming per se, the committee believes that providing beneficiaries with improved oppor- tunities for "informed choice of quality providers" may be a more impor- tant and meaningful objective. Research Evidence and Empirical Observations In carrying out its charge, the committee struggled with the limita- tions and lack of comparability of critical data for definitive assessment of the changing financial and organizational statuses of safety net providers and the populations they serve. The committee was asked to give its priority attention to primary care safety net providers operating in ambu- latory care settings. Research and data collection activities have, however, focused primarily on hospitals and other institutional providers. In addi- tion, survey data are available from relevant member organizations and advocacy groups5 as well as HRSA, but these data are frequently limited 5American Hospital Association, National Association of Public Hospitals and Health systems, National Association of community Health centers, and National Association of county and city Health Officials.

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36 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED The BBA of 1997 also allows MCOs to provide the augmented services offered by FQHCs without specifically contracting with these providers. The BBA of 1997 generally leaves vague the terms of any contractual arrangements MCOs might elect to enter into with FQHCs (Alpha Center, 1998~. The BBA of 1997 contains a number of other provisions designed to achieve federal savings by reducing Medicaid reimbursements to hospi-

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BACKGROUND AND OVERVIEW 37 tats generally and to "disproportionate share" hospitals in particular. The BBA of 1997 still requires states to make additional payments to hospitals that serve large numbers of Medicaid or uninsured patients, but it limits the federal Medicaid matching funds available for these DSH payments in each state. Under the BBA of 1997, states that want to limit Medicaid beneficia- ries living in urban areas to a choice between two MCOs can do so with- out seeking a waiver from the Secretary of DHHS. States can also limit beneficiaries living in rural areas to a single MCO. The Act contains pro- visions that help stabilize plan enrollment to address the cyclical nature of Medicaid eligibility. States are given the option to impose an annual lock- in with a 90-day open-enrollment period and can, if they choose, guaran- tee 6 months of Medicaid eligibility to any beneficiary or guarantee 12 months of eligibility to children up to age 19. A 1999 survey by the National Academy for State Health Policy indicates that a number of states are investing in continuity of care by increasing their use of lock-ins and guaranteed eligibility (Kaye et al., 1999~. The broader participation of core safety net providers in managed care was given a major boost by a provision in the BBA of 1997 that for the first time permits states to contract with Medicaid-only MCOs without first obtaining a federal waiver. Managed care plans sponsored by pro- viders (called provider-sponsored organizations [PSOs]), such as CHCs or hospitals, can participate in Medicare and Medicaid independently of insurance companies. PSOs must be licensed under state law as risk- bearing entities, and the federal government must certify that they meet the requirements necessary to provide care to the Medicare population. Such plans must also adhere to federal consumer protections or to state protections if the latter are more stringent. PSOs can, however, obtain a waiver from state licensure that permits them to operate without the requirement of large reserves, taking into account their ability to provide services as assets against insolvency (National Association of Public Hos- pitals and Health Systems, 1997~. An analysis of the BBA of 1997 prepared for The Kaiser Commission on the Future of Medicaid concluded that the Act does not articulate a clear policy for the support of safety net providers in that it contains provisions that may both harm and benefit them (Schneider, 1997~. Although some provisions of the BBA of 1997 reduce Medicaid reimbursements to safety net providers, other provisions make it easier for safety net providers to participate in managed care by liberalizing solvency requirements for this group. The analysis suggests that the changes for safety net providers brought about by the BBA of 1997 will probably take a few years to assess and will likely vary significantly from community to community and state to state.

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38 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED Changing Medicaid Managed Care Market As revenues are squeezed across the health care industry, providers and health plans that previously shunned the Medicaid market have geared up to compete for Medicaid patients. The years 1992 to 1996 saw a sharp growth in HMO participation in the Medicaid market, a growth that included all market segments and all forms of profit and ownership status (Felt-Lisk and Yang, 1997~. Efforts to expand choice for Medicaid beneficiaries through commercial managed care plans have recently hit some snags. Since 1997, commercial plans exited the Medicaid market in much greater numbers than in previous years and entered new Medicaid market less frequently (Felt-Lisk, 1999~. In exiting the Medicaid market, plans cite low capitation rates, declin- ing profitability, and financially burdensome administrative requirements imposed by states as major reasons for exiting the Medicaid managed care business (Hurley and McCue, 1998~. Moreover, as states have moved from voluntary to mandatory Medicaid managed care programs, HMOs have seen their profitability decline (Hurley and McCue, 1998~. After ini- tially offering fairly generous rates to attract plans into the Medicaid mar- ket, many states have lowered their rates and demanded more in areas of contract specification. Contributing further to the Medicaid managed care market turnaround among commercial plans were declining profits in other lines of business and lower-than-expected Medicaid enrollments. Nevertheless, despite the withdrawals, commercial plans continue to play an important role in serving the Medicaid population in some markets. The fall off in commercial plan participation has been accompanied by a rapid growth in Medicaid-only or Medicaid-dominated plans (defined as those plans that have a greater than 75 percent Medicaid enrollment). These plans vary widely in ownership type, and are a mix of for-profit and not-for-profit entities. Medicaid-only plans tend to be smaller and highly reliant on one revenue stream. A recent study by the New York Academy of Medicine and the Columbia University School of Public Health surveyed 99 safety net plans across the country (Gray and Rowe, 2000~. More than half of the entries were new plans, many of them sponsored or organized by core safety net providers. The Gray and Rowe study indicates that these plans are sur- viving but are "on the edge." A majority of the plans in the survey lost money in 1997 (as did many commercial plans that then exited the Medic- aid market). In assessing the impact of the current market changes, the Felt-Lisk studies suggest that little is known to date about whether and how Medicaid-only plans better serve the Medicaid population and to what degree the exit of commercial plans affects access to "mainstream" care

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BACKGROUND AND OVERVIEW 39 and quality of care. However, a number of newly published studies (dis- cussed in Chapters 4 and 5 of this report) are beginning to shed some light on this important issue. Declining Medicaid Enrollment After a period of steadily increasing Medicaid enrollment that began in the late 1980s, enrollment has declined steadily since 1995. Although much of this decline can be attributed to a healthy economy, shrinking Medicaid rolls have been exacerbated by the impact of welfare reform, which severed the link between cash assistance and Medicaid coverage. A 1999 analysis by the Families USA Foundation estimates that almost 700,000 people became uninsured as a direct result of welfare reform, with children making up 62 percent of those people (Families USA Foun- dation, 1999~. A more recent U.S. General Accounting Office study mea- sured 7 percent national decline in Medicaid enrollment between 1995 and 1997 (see Figure 3.7), ranging from only a 0.1 percent decline in Con- necticut to a 17.4 percent decline in the state of Wisconsin (U.S. General Accounting Office, 1999~. Counter to national trends, 10 states increased their Medicaid enrollments between 1995 and 1997. DHHS is urging states to make extra efforts to maintain Medicaid eligibility independent from eligibility for welfare assistance, but widespread difficulties in doing so remain. The decline in Medicaid enrollment and the increased competition for some Medicaid patients in some markets are beginning to affect the rev- enue streams of core safety net providers (Gaskin, 1999~. Eligibility and program expansions over recent years have made safety net providers increasingly reliant on Medicaid dollars. Increased Medicaid funding and cost-based reimbursement have come to provide a critical "silent subsidy" to help core safety net providers pay for overhead and infrastructure costs, freeing limited grant funds to pay for care for uninsured individuals. There are growing indications that more restricted Medicaid revenues are leaving some safety net providers in a more precarious position to fund care for the growing number of uninsured individuals seen by these pro- viders (Solomon, 1998~. Declining Coverage for Immigrant Populations Welfare reform has also had a serious effect on the ability of legal immigrants to gain Medicaid coverage. Provisions in the new welfare law make legal immigrants who entered the United States after August 22, 1996, ineligible for Medicaid, with the exception of emergency services, for the first 5 years after their arrival in the country. Uncertain of their

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40 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED rights and fearing penalties associated with applying for assistance de- nial of citizenship or a "green card" to work in the United States many immigrants continue to forego benefits to which they are legally entitled. In response, large numbers of Medicaid-ineligible documented and undocumented immigrants in states like California, Texas, New York, and Florida are placing increasing demands on already stretched safety net infrastructures. Hispanics, African Americans, and other minority groups are overrepresented among the uninsured population and make up a major segment of the safety net patient population. In May 1999, the administration took a step to allay the fear factor, issuing a rule clarifying a long-standing "public charge" policy designed to keep immigrants from becoming dependent on government aid by denying them admission into the country or threatening deportation (Morse, 1999~. Specifically, the new rule said that the State Department or Immigration and Naturalization Service may not consider Medicaid or SCHIP in deciding public charge status. The extent to which this new rule will encourage immigrants to apply for coverage is not yet known. Declining Subsidies Together with the eventual phaseout of FQHC cost-based reimburse- ment, other major direct and indirect subsidies that in the past have helped safety net providers support care for vulnerable populations are being reduced or eliminated. Since the early l990s, safety net hospitals have increasingly relied on DSH payments to help support care for vulnerable populations. Questionable actions by states to obtain maximal DSH pay- ments led to a tremendous rise in program expenditures, from $1.3 billion in 1990 to $17.7 billion in 1992 (Coughlin and Liska, 1998~. The BBA of 1997 reduces federal DSH payments to states by $10.4 billion between fiscal years 1998 and 2002. Using data from the National Association of Public Hospitals, a new study on subsidy reductions for the core safety net underscores the critical role that DSH payments have assumed over the years in financing indigent care (Fagnani and Tolbert, 1999~. In 1996 Medicare and Medicaid DSH payment combined paid for nearly 40 per- cent of the uncompensated care provided by core public hospitals. The report suggests that in the future DSH payment programs be better tar- geted to those safety net hospitals shouldering the greatest burden of uncompensated care and that the DSH payment allocation formula be reconfigured to reflect the increasing use of outpatient services. A fundamental principle of competitive managed care is the ability of large purchasers to negotiate with MCOs for a best or discounted price for their own covered lives. These very discounts, however, which have helped slow the rate of inflation in health care costs, have also helped

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BACKGROUND AND OVERVIEW 41 erode the financial margins that providers received from private payers to cover care for uninsured patients. Recent studies and surveys provide evidence that managed care cost pressures are limiting the ability of com- munity physicians to deliver charity care (Bindman et al., 1998; Cunningham et al., 1999~. Similarly, on the inpatient side, the growing penetration of Medicaid managed care and the declining ability to shift costs appear to be reducing hospitals' capacities to deliver uncompen- sated care (Atkinson et al., 1997; Weissman et al., 1999~. Additional recent data suggest that although Medicaid revenues are being more broadly dispersed among hospitals in the 100 largest metropolitan statistical ar- eas, uncompensated care is becoming increasingly concentrated among a smaller number of institutions (Gaskin, 1999~. There is rising concern that the market is reducing the ability of the health care system to provide uncompensated care without creating a mechanism for addressing the gap in health care financing created by the decline in the level of insur- ance coverage (Smith, 1997~. How Core Safety Net Providers Are Responding Although many core safety net providers were originally fearful, reluctant, and not well equipped to participate in Medicaid managed care, their rate of participation in state risk-based managed care programs has increased substantially in recent years. According to the Bureau of Primary Health Care, 437 FQHCs (nearly two-thirds) reported that they participated in Medicaid managed care arrangements in 1998, which is more than a twofold increase from the number (202) in 1995 (Bureau of Primary Health Care, HRSA, unpublished data, 1999~. In many localities CHCs are viewed as attractive partners for MCOs given their locations, convenient hours, primary care orientation, and cultural and linguistic capacities (Baxter and Feldman, 1999; Lipson, 1997; West, 1999~. Growth in managed care participation now extends beyond CHCs and public hospitals to include local health departments, maternal and child health clinics, and mental health clinics (Solloway and Darnell,1998~. Many local health departments and other special service providers are facing greater hurdles in their adaptation to managed care given the more limited range of their direct service delivery component. Rural health providers, although broadly involved in managed care, face particular problems related to their special geographic and demographic character- istics (Ricketts et al., 1998~. The core safety net providers' adaptations to the new health care marketplace have brought opportunities as well as challenges. Competi- tive managed care has provided strong incentives for core safety net pro- viders as well as other providers to become more efficient, more customer

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42 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED oriented, and more performance based. Safety net providers, however, tend to be more costly given their vulnerable and harder-to-serve patient populations, a disincentive for plans to contract with them or to pay them their costs. As mandated rather than voluntary managed care becomes predominant, many core safety net providers may be required to accept lower payments than they had received under the fee-for-service system. In addition, safety net providers generally lack the financial reserves and management and information infrastructures needed to respond quickly and competitively to the many new requirements of managed care. Even core safety net providers that in the past resisted managed care have come to see the need to adapt to a more competitive environment. In assessing various managed care participation strategies, most safety net providers view the maintenance of their Medicaid patient base, the poten- tial to gain greater contracting leverage in their local markets, and the ability to continue to serve the uninsured population as major priorities. Specific strategies include developing partnerships and networks; build- ing integrated delivery systems; improving quality, customer service, and efficiency; and improving operating and information management capa- bilities. As a longer-term goal, core safety net providers hope to reduce dependence on Medicaid enrollment and gain Medicare and commercial contracts. A major survey of adaptive strategies refers to the "arranged mar- riage" of MCOs and safety net providers. Both have valuable credentials to bring to managed care, but the challenge lies in melding often very different cultures, management styles, and service orientations (Lipson, 1997~. To date, most adaptive and survival strategies are still in the early stages, and it is too early to conclude what strategies will be the most successful. State and local policies governing care for vulnerable populations continue to be a critical dimension of how local safety nets are faring. In the past states have used "Medicaid maximization" to help protect safety net providers and to subsidize some of their services.~ Today, a number of states are continuing to use these and other special measures aimed at either encouraging commercial health plans to include core safety net providers in their networks, facilitating the creation of managed care plans centered on core safety net providers, or providing special subsidies to major core safety net providers (Coughlin et al., 1999~. There is worry, however, that these accommodations will erode potential savings to the states from Medicaid managed care. New budget priorities, unexpected Soothe process of shifting state-funded programs into Medicaid and receiving a federal matching payment is commonly referred to as "Medicaid maximization" (Coughlin et aL, 1999~.

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BACKGROUND AND OVERVIEW 43 Medicaid cost increases, or an economic downturn could add uncertainty to the sustainability of these special provisions. In this rapidly evolving environment, the safety net appears to be on increasingly shaky underpinnings. How current price pressures and other changes in the health care marketplace will continue to evolve and affect these providers' ability to maintain their mission to serve America's most vulnerable citizens is becoming a mounting policy concern and forms the basis of this study. 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. Alpha Center. 2000. State of the States Report. Washington, DC: Alpha Center. Atkinson, G., Helms, W., and Needleman, J. 1997. State Trends in Hospital Uncompensated Care. Health Affairs, 16~4), 233-241. Baxter, R., and Feldman, R. 1999. Staying in the Game: Health System Change Challenges Care for the Poor. Fairfax, VA: Center for Studying Health System Change. Baxter, R., and Mechanic, R. E. 1997. The Status of Local Health Care Safety Nets. Health Affairs, 16~4), 7-23. Bindman, A., Grumbach, K., Vranizan, K., Jaffe, D., and Osmond, D. 1998. Selection and Exclusion of Primary Care Physicians by Managed Care Organizations. JAMA, 279~9), 675-679. Bovbjerg, R., and Marsteller, J. 1998. Health Care Marketplace Competition in Six States: Impli- cationsfor the Poor. Paper No. 17. Washington, DC: The Urban Institute. Budetti, P. 1998. Health Insurance for Children A Model for Incremental Health Reform? New England Journal of Medicine, 338~8), 541-542. Carrasquillo, O., Himmelstein, D., Woolhandler, S., and Bor, D. 1998. Can Medicaid Man- aged Care Provide Continuity of Care to New Medicaid Enrollees? An Analysis of Tenure on Medicaid. American Journal of Public Health, 88~3), 464~66. Coughlin, T., and Liska, D. 1998. Changing State and Federal Payment Policies for Medic- aid Disproportionate-Share Hospitals. Health Affairs, 17~3), 118-136. Coughlin, T., Zuckerman, S., Wallin, S., and Holahan, J. 1999. A Conflict of Strategies: Medicaid Managed Care and Medicaid Maximization. Health Services Research, 34~1), 281-293. Cunningham, P., and Pickreign, J. 1997. Uninsurance Rates Vary Widely Across Communities and Regions. Data Bulletin No. 5. Washington, DC: Center for Studying Health System Change. Cunningham, P., and Tu, H. 1997. A Changing Picture of Uncompensated Care. Health Affairs, 16~4), 167-175. Cunningham, P., Grossman, J., St. Peter, R., and Lesser, C. 1999. Managed Care and Physi- cians' Provision of Charity Care. JAMA, 281~12), 1087-1092. 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. Employee Benefit Research Institute. 1999. National Health Expenditures Top $1 Trillion Dollars for Second Year in 1997. EBRI Notes, 20~3), 3-6.

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BACKGROUND AND OVERVIEW 45 Lee, J. 1997. Managed Health Care: A Primer. Washington, DC: Congressional Research Ser- vice/The Library of Congress. Lefkowitz, B. and Todd, J. 1999. An Overview: Health Centers at the Crossroads. Journal of Ambulatory Care Management, 22~4), 1-12. Lipson, D. 1997. Medicaid Managed Care and Community Providers: New Partnerships. Health Affairs, 16(4), 91-107. Mann, J., Melnick, G., Bamezai, A., and Zwanziger, J. 1995. Uncompensated Care: Hospi- tals' Responses to Fiscal Pressures. Health Affairs, 14~1), 263-270. Mann, J., Melnick, G., Bamezai, A., and Zwanziger, J. 1997. A Profile of Uncompensated Hospital Care, 1983-1995. Health Affairs, 16~4), 223-232. McCall, N. 1996. The Arizona Health Care Cost Containment System: Thirteen Years of Managed Care in Medicaid. Menlo Park, CA: The Henry J. Kaiser Family Foundation. Morse, A. 1999. CHIP and the Immigrant Community: Getting Out the Word on 'Public Charge.' State Health Notes, 20~308), 1, 6. National Association of Community Health Centers. 1999. Compromise Delays Phase-Out of Health Center Payment System Orders Congressional Report on Impact and Alternative Payment Mechanisms. [WWW document]. URL http: / /www.nachc.com/FSA/ FederalAgenda/PPS/Compromise%20Announcement.htm (accessed February 1, 2000~. National Association of Public Hospitals and Health Systems. 1997. The Balanced Budget Act of 1997: Opportunities for Safety Net Health Care Providers. Washington, DC: National Association of Public Hospitals and Health Systems. Norton, S., and Lipson, D. 1998. Public Policy, Market Forces, and the Viability of Safety Net Providers. Occasional Paper No. 13. Washington, DC: The Urban Institute. Perry, M., Kannel, S., Valdez, R., and Chang, C. 2000. Medicaid and Children: Overcoming Barriers to Enrollment. Findings from a National Survey. Washington, DC: The Henry J. Kaiser Family Foundation. Ricketts, T., Slifkin, R., and Silberman, P. 1998. Commissioned Paper. The Changing Market, Managed Care and the Future Viability of Safety Net Providers Special Issues for Rural Providers. Chapel Hill, NC: Cecil G. Sheps Center for Health Services Research, Uni- versity of North Carolina. Robinson, G., Bergman, G., Crow, S., and Scallet, L. 1998. Behavioral Health Community Pro- viders Response to Managed Care. Fairfax, VA: The Lewin Group. Rosenbaum, S., and Darnell, J. 1997. Statewide Medicaid Managed Care Demonstrations under Section 1115 of the Social Security Act: A Review of the Waiver Applications, Letters of Approval and Special Terms and Conditions. Washington, DC: The Henry J. Kaiser Family Foundation. Rosenbaum, S., Shin, P., Zakheim, M., Shaw, K., and Teitelbaum, J. 1998. Negotiating the New Health System: A Nationwide Study of Medicaid Managed Care Contracts. Special Re- port: Mental Illness and Addiction Disorder Treatment and Prevention, 2nd ed. Washing- ton, DC: Center for Health Services Research and Policy, The George Washington University. Rosenbaum, S., Shin, P., Markus, A., and Darnell, J. 2000. A Profile of America's Health Cen- ters. Washington, DC: The Henry J. Kaiser Family Foundation. Rovner, J. 1996. The Safety Net: What's Happening to Health Care of Last Resort? Advances, Supplement(1), 1~. Princeton, NJ: The Robert Wood Johnson Foundation. Schneider, A.1997. Overview of Medicaid Managed Care Provisions in the Balanced Budget Act of 1997. Washington, DC: The Henry J. Kaiser Family Foundation. Schneider, A., and Spivey, M. 1999. Commissioned Paper. Issues in Designing a Fund for Safety Net Providers. Washington, DC: Health Policy Group.

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46 AMERICA'S HEALTH CARE SAFETY NET: INTACT BUT ENDANGERED Shields, A. 1999. Commissioned Paper. Understanding the Role and Future Viability of Safety Net Providers: Data Resources and Information Gaps. Washington, DC: Institute for Health Care Research and Policy, The Georgetown University Medical Center. Smith, B. 1997. Trends in Health Care Coverage and Financing and Their Implications for Policy. New England Journal of Medicine, 337~14), 1000-1003. Solloway, M., and Darnell, J. 1998. The Impact of Medicaid Managed Care on Essential Commu- nity Providers. Portland, ME: National Academy for State Health Policy. Solomon, L. 1998. Rules of the Game: How Public Policy Affects Local Health Care Markets. Health Affairs, 17(4), 140-148. Thorpe, K. 1997. The Rising Number of Uninsured Workers: An Approaching Crisis in Health Care Financing. New Orleans, LA: Tulane University. U.S. General Accounting Office. 1999. Medicaid Enrollment: Amid Declines, State Efforts to Ensure Coverage After Welfare Reform Vary (GAO/HEHS-99-163~. Washington, DC: U.S. General Accounting Office. Weissman, J., Saglam, D., Campbell, E., Causino, N., and Blumenthal, D. 1999. Market Forces and Unsponsored Research in Academic Health Centers. JAMA, 281~12) 1093- 1098. West, D. 1999. Medicaid Managed Care: Linking Success to Safety-Net Provider Recruit- ment and Retention. Journal of Ambulatory Care Management, 22~4), 28-32. Zuckerman, S., Coughlin, T., Nichols, L., Liska, D., Ormond, B., Berkowitz, A., Dunleavy, M., Korb, J., and McCall, N. 1998. Health Policy for Low-Income People in California. Washington, DC: The Urban Institute.