Lessons From Kentucky’s First Year of Medicaid Managed Care

For months, Kansas Governor Sam Brownback has planned to implement KanCare, a mandatory, statewide Medicaid managed care program, on January 1, 2013. CMS has not yet approved the waiver request, and on Monday, November 26, 2012, CMS held a listening session via conference call to hear the views of Medicaid beneficiaries. CMS representatives indicated Monday that they hoped to make a decision soon. As recently as November 27, 2012, Kansas officials maintained that KanCare was expected to go live on January 1, and there was no Plan B. The agency has auto-assigned current beneficiaries to plans and mailed notices informing them of the plan to which they were assigned. All beneficiaries were to receive their packets by the end of November, 2012.

Kansas might take a lesson from Kentucky’s experience with the implementation of Medicaid managed care. The Foundation for a Healthy Kentucky recently released a report commissioned from the Urban Institute evaluating the first year under the new system. As we have previously reported, during the first few months, there were complaints from providers and beneficiaries about denials of refills of established prescriptions, delayed authorizations, and failure to pay providers.

The researchers examined several steps that were important to the success of the launch, from the competitive bidding process to the operations of the program as of the summer of 2012; they supplemented with a discussion of developments that occurred up to mid-October, when Kentucky Spirit notified the state of the termination of the contract effective July 1, 2013.

The State’s Contracting Process

Although the state had hired PriceWaterhouseCoopers to determine the rates that would be actuarially sound, the bidders did not have access to that information when they developed their proposed rates. According to the report, the actuary stated that the plans were told during the negotiation process whether their proposed rates were within the appropriate range. One plan claimed never to have received the information, however. The plans also claim that the claims  information they received was not complete and sometimes was inaccurate. In any event, the state contracted to pay significantly different rates to each plan.

 The Start-up and Provider Networks

The state’s contracts with the plans were finalized July 8, 2011, and open enrollment was set to begin November 1st. None of the three plans had previously operated in Kentucky, so they had to find office space, hire and train staff, negotiate rates and contract with providers, adapt their existing systems to Kentucky’s Medicaid program,educate providers about the claims process, and market their services to beneficiaries.  Not many workers in the Kentucky job market had managed care experience, so employees of both the plans and the state agency had a steep learning curve. Some providers stated that the plans’ communication technology was antiquated and relied heavily on “snail mail” and fax transmissions.

Because capitated payments were already set, when they built their networks, the plans’ ability to offer attractive rates was limited. Some providers, notably Appalachian Regional Healthcare (ARH), furnished services without a contract while negotiations continued. Because the networks had not been finalized when enrollment began, the network directories were inaccurate. Beneficiaries were assigned to plans based on letters of intent from their primary care providers (PCPs) chose not to participate. Once assigned to plans, some beneficiaries were assigned to PCPs who were inappropriate to their needs or did not participate in the plan.

The state auto-enrolled beneficiaries into plans and then gave them 90 days to change plans if they chose. Because Kentucky Spirit had the lowest rates, the state assigned it 200,000 of about 520,000 members.  Many beneficiaries changed plans during the 90 day period, some, more than once, as they learned of the different incentives or benefits each plan offered. The Coventry plan required no copayments and had a broader network, so it is logical, as Coventry claims, that a disproportionate number of beneficiaries with chronic illness and heavier utilization changed from other plans to Coventry. By June, 2012, Kentucky Spirit had about 138,000 members, 27.5 percent of the Medicaid beneficiaries in the program, while Coventry had about 233,680, 44.8 percent.

Other Problems

Providers reported that denials of authorization and claims rose sharply under the managed care system, requiring an inordinate number of appeals and time spent on administrative issues. Both the fee-for-service program and the plans used the InterQual criteria for authorization, but providers complained that the plans applied the criteria differently, and, sometimes, incorrectly. The plans were not familiar with the coding system that the agency and providers used previously. The three plans had different formularies for providers to follow.

All three plans lost money during the first two quarters of their contracts. Coventry lost the most. As we’ve reported before, the plan tried to terminate and renegotiate its contracts with many providers.

The report recommends that the agency pay special attention to network adequacy and to the financial losses of both plans and providers. Open communication and accurate data are necessary to the success of the program.  The payment structure could be changed to reward improved health outcomes.

The reporters were encouraged by some recent developments. The agency has a new Medicaid Commissioner with many years of managed care experience. The state has contracted with an external quality review organization, which will help with oversight of the plans. And the plans all have better information to plan for the future.

What Will Enrollees in the New Health Exchanges Look Like?

In about one year from now approximately 12 million individuals will begin looking for health insurance coverage by using a health insurance exchange authorized by the Affordable Care Act (ACA) (P.L. 111-148 and P.L. 111-152).  By 2021 that number is expected to be nearly 30 million.  What will be the demographic make up of these people, and what will theses exchanges look like where they will be shopping for insurance coverage?  A report by PricewaterhouseCoopers’ (PwC) Health Research Institute (HRI) examined these questions and came to the conclusion that the market place will look different as a different type of customer will be looking for insurance and receiving health care than the current customer.  

Enrollees. PwC’s HRI report found that the  average median age of an individual purchasing insurance via an insurance exchange is expected to be about 33.  The majority of these individuals, 88 percent, are expected to be in good health.  They will mostly be caucasian with one in five speaking a language other than English at home, primarily Spanish. Only 24 percent are expected to hold a bachelor’s degree.  Currently, 40 percent of individuals having health insurance have a college degree. 

While 60 percent of the adults purchasing insurance through an exchange will be employed full-time it is expected that 90 percent of adults will qualify for a subsidy for 2014, according to a Congressional Budget Office Report.  Early on it is expected that 60 percent of individuals purchasing insurance will have an income at or below 200 percent of the federal poverty level or less than $46,100 for a family of four.  It is estimated that in 2014, 16 percent of individuals purchasing insurance through he exchanges will have an income in excess of 300 percent of the FPL.  But that is expected to increase to 35 percent in 2021.

The majority of individuals purchasing insurance through an exchange will be new to the insurance market.  It is estimated that for 75 percent this will be the first time they ever had insurance, according the PwC’s HRI analysis.  It is estimated that 38 percent of individuals purchasing insurance from an insurance exchange will be eligible for Medicaid twice over the first four years of their enrollment.  This churning will cause issues for the exchanges.  Some states are proposing that a person who purchases insurance through the exchange will have the same identification card as a Medicaid enrollee, thereby making the transition easier for the insured and the state running the exchange as well as the Medicaid program.

Exchanges. Exchanges can be run by the state, the federal government or a partnership of the two.  States that run their own exchanges will have to decide if they are going to have an open or closed exchange.  In an open exchange any insurer can enter the exchange.  In a closed exchange the state will screen insurers and select plans that can participate in the exchange.  States like California, Oregon and Connecticut will have closed exchanges. 

States that run their own exchanges will have to set eligibility standards for insurance providers and members.  They will have to develop customer service plans and provide financial oversight as well.  States will have set up websites, call centers, IT center, and out reach programs.  Participating insurers will be subject to risk corridor programs that limit variations in gains and losses by the insurance companies.  In the first years of participation an insurance company will be required to relinquish profits above 3 percent in addition to the 15 – 20 percent limitation on expenditure on non-health care functions.  While insurers will be limited in their profitability they will be able to develop plans in a more broad way allowing customers to select benefit options like coverage for chiropractic care and other types of care that will affect premium prices as well as company profitability.

The addition of tens of millions of new customers to the insurance and health care market will change how insurers and medical providers deliver their product.  The new demographics of these people as well as their experience or lack of experience with providers and insurers will provide new challenges for both of these markets.

Do Medicaid Managed Care Plans Succeed Financially?

Can a company actually make a profit managing—and paying for— the care of Medicaid beneficiaries? CMS and the Commonwealth Fund recently published a study on the financial health of Medicaid managed care organizations. The study compared the profitability of Medicaid managed care organizations operated by insurers with other lines of business (multi-product plans) to those operated by insurers focused specifically on Medicaid members (Medicaid-dominant), considering three ratios: medical loss (MLR), administrative cost, and operating margin.

The author defined “operating margin” as premium revenue minus both medical and administrative costs;the operating margin ratio was a measure of how well the organization managed its costs in relation to its revenue.The relationship between financial health and provider sponsorship also was examined. The author defined provider-sponsored plans as plans owned, operated by or affiliated with hospitals, health care systems or medical clinics.

Which were more profitable?

Medicaid-dominant plans did better than multi-product plans. Provider-sponsored plans did better than those sponsored by others. Medicaid-dominant plans sponsored by providers had an operating margin ratio of 2.2. Of the Medicaid-dominant plans that were not sponsored by providers, publicly traded plans had the worst results financially, with an operating margin of 0.6.

In contrast, the multi-product plans all fared poorly. Those that were provider-sponsored broke even; their operating margin was zero. The others all lost money. Publicly traded plans did as well as those that were privately owned, with operating margins of -1.1.

So, how did the plans spend their money? What percent was paid out for medical care, and what was spent on administrative costs?

On this measure, one variable that stood out was the difference between provider-sponsored plans and those that weren’t.Provider-sponsored plans, on average, spent the most on medical care (90.6 percent) and the least on administration (8.9 percent). When provider-sponsored plans were analyzed further  by Medicaid-dominant or multi-product status, they still were consistent in spending more on care and less on administration. To be fair, the spending pattern of the Medicaid-dominant plans that were not provider-sponsored but also were not publicly traded was the same as the provider-sponsored Medicaid plans,unlike plans that were publicly traded. The publicly traded Medicaid-dominant plans had the lowest MLR (86.2) and the highest administrative cost ratio (13.3). In contrast, the MLRs of the other Medicaid-dominant plans were 88.5 (provider-sponsored) and 88.6 (not publicly traded), and their administrative cost ratios were 9.5 and 9.6, respectively, which might mean that the priorities of smaller, locally owned plans differ from those of the publicly traded plans.

The multi-product plans tended to spend less on administration and more on medical care than the Medicaid-dominant plans. The multi-product provider-sponsored plans had the highest MLR, 91.6 percent, and the lowest administrative cost ratio, 8.4 percent. They were the ones who broke even.

The author concludes that Medicaid managed care organizations do best financially when they focus on serving the Medicaid population. Those that are publicly traded might do better if they shaved their administrative costs, but perhaps they are hiring staff with expertise on the needs of the diverse Medicaid population, or investing in modern computer systems, which would result in greater efficiency.

The developments discussed in earlier posts might lend support to a different conclusion, however.  Perhaps the multi-product plans spend more on care because they are serving members who expect it. Do plans that are paid more in premiums spend a higher percentage on care? Maybe the publicly traded plans spend more on administration because they must report to shareholders and a parent corporation, or they have more layers of bureaucracy.And how do all these changes affect quality of care?

With the states increasingly moving to a model where care is managed by private companies, more research is certainly needed.

Chief Justice Robert’s PPACA Opinion: Conservative and True To Form

Despite allegations of the opposite, the PPACA-related opinion of Chief Justice Roberts is a very conservative opinion, even though the effect of it is to join with the liberal justice who voted to uphold the individual mandate and the rest of the Patient Protection and Affordable Care Act. Chief Justice Roberts, by applying a strict constructionist interpretation of the U.S. Constitution and a strict adherence to previous court opinions found that the individual mandate was a tax, and that as a tax it was not beyond the powers of Congress.

The end result of Chief Justice Robert’s opinion was that he was the crucial vote in upholding a law that many of his strict constructionist supporters did not like, but despite their frustration he stayed true to his strict constructionist philosophy. In so doing, he established two precedent’s; limiting the power of Congress to use the Commerce Clause and the Reasonable and Necessary Clause that will help greatly limit future Congressional actions.

Chief Justice Roberts begins and ends his opinion in the very first and very last paragraph of his opinion with a civics course refresher.  He says that the purpose of the court is not to decide if a particular policy is a good one, or one he personally likes.  The purpose of the Court is to determine if Congress acted within its power when establishing that policy; the exact definition of strict constructionist interpretation. “The Framers created a Federal Government of limited powers, and assigned to this Court the duty of enforcing those limits. The Court does so today. But the Court does not express any opinion on the wisdom of the Affordable Care Act.”  Chief Justice Roberts continues, “In this case we must again determine whether the Constitution grants Congress powers it now asserts,” and Chief Justice Roberts finds that Congress is legitimately asserting a power to tax.  

He than reminds us that the most important part of the process in determining whether a policy is a good one or not, is the vote cast by the citizens who elect the policy makers, “Under the Constitution, that judgment is re­served to the people,” and not appointed magistrates.

Chief Justice Roberts uses a tried and true court practice of deferring to previous rulings to determine that the enforcement provision of the individual mandate is an acceptable tax. In those previous opinions, Chief Justice Roberts states, that every time a statute can be seen as either constitutional or unconstitutional, the court properly deferred to the constitutional interpretation; a very conservative opinion.  He is not breaking with court precedent, but following it. Chief Justice Roberts quotes Justice Story from a 180 year old opinion “It is well established that if a statute has two possible meanings, one of which violates the Constitution, courts should adopt the meaning that does not do so.”  Justice Story continued “No court ought, unless the terms of an act rendered it una­voidable, to give a construction to it which should involve a violation, however unintentional, of the constitution.” Parsons v. Bedford, 3 Pet. 433, 448449 (1830).  Chief Justice Roberts then finds the same line of reasoning in the opinion Justice Holmes a century later, “[T]he rule is settled that as between two possible interpretations of a statute, by one of which it would be unconstitutional and by the other valid, our plain duty is to adopt that which will save the Act.” Blodgett v. Holden, 275U. S. 142, 148 (1927).

Earlier in his opinion Chief Justice Roberts set an important precedent by stating that Congress cannot use the Commerce Clause to force an individual into a particular line of commerce in which they do not want to be. He succinctly ends the portion of his opinion on the Commerce Clause by saying, “the individual mandate forces individuals into commerce precisely because they elected to refrain from commercial activity. Such a law cannot be sustained under a clause authorizing Congress to ‘regulate Commerce.’”  This is a very conservative thought; limiting Congress’ power to force a person into a commercial transaction, and a precedent that could have large implications for future legislative endeavors of Congress.

Chief Justice Roberts then writes that the Reasonable and Necessary Clause of the Constitution is limited as well; again another conservative precedent that preserves a strict constructionist interpretation of the Constitution.  He says, “Rather, such a conception of the Necessary and Proper Clause would work a substantial expansion of federal authority…. Instead Congress could reach beyond the natural limit of its authority and draw within its regulatory scope those who otherwise would be outside of it. Even if the individual mandate is ‘necessary’ to the Act’s insurance reforms, such an expansion of federal power is not a ‘proper’ means for making those reforms effective.”