HD33 - Evaluation of a Health Insuring Organization for the Administration of Medicaid in Virginia
Executive Summary: The Virginia Medical Assistance Program (Medicaid) is a federally-mandated, State-administered program to provide basic health care services to low-income Virginians. Under federal regulations for Medicaid, states have some flexibility in how they administer their Medicaid programs. Currently, three basic administrative models are in use: the state agency model, the fiscal agent model, and the health insuring organization model. These models differ in the extent to which they use private contractors to perform some of the administrative functions of the program. This special report examines the potential benefits of a health insuring organization for the Virginia Medicaid program, and assesses the potential for program cost avoidances. The review was mandated by Item 13 of the 1991 Appropriation Act. Administration of Medicaid Programs by the States The state agency model uses one or more state agencies to perform all of the functions necessary to manage the Medicaid program, including determination of recipient eligibility, claims processing, utilization review, etc. This model is also called "self-administration." Currently, 15 states use this approach to manage their Medicaid programs. Under the fiscal agent model, the state Medicaid agency contracts with a private company to perform claims processing and related functions. The state agency retains responsibility for other functions. This approach is used most often to manage Medicaid programs, with 32 states and the District of Columbia currently operating with fiscal agents. Virginia is among the states using the fiscal agent model for management of the Medicaid program. The health insuring organization (HIO) model is a variation of prepaid health insurance for Medicaid recipients. Under this approach, the state contracts with an insurance company for the provision of health care services to the Medicaid eligible population, and the state pays monthly premiums for each eligible recipient. The insurance company reimburses Medicaid providers for the services provided to insured recipients. Currently, only two states use the HIO model statewide for administration of their Medicaid programs. The Benefits of Insured Medicaid Programs Have Been Aggressively Promoted Health insuring organizations have been promoted as providing significant benefits for state Medicaid programs. These benefits are generally ascribed to the private nature of the insurance purchased through the HIO. Because program benefits for the Medicaid-eligible population are managed by a private insurance company, private market incentives are said to be incorporated into the funding of the program. These incentives are said to reduce program costs, while improving access to health care for program recipients. The five benefits most often cited are: (1) the risk of benefit cost increases is transferred to the private insurance contractor, (2) private market incentives ensure that program costs are controlled, (3) state program costs are more stable from year to year, (4) federal funding is increased, and (5) the return from the investment of public funds is enhanced. The Transfer of Risk is Limited in an HIO The HIO model for the administration of Medicaid involves the purchase of prepaid health insurance for the Medicaid-eligible population. The current HIO model, however, does not constitute a fully-insured program. In fact, under the current HIO model, the state continues to self-fund all but a very small proportion of benefit costs. Little risk is actually transferred to the insurance company. In effect, the HIO uses a "quota share," which modifies the insurance arrangement to provide for a cost settlement at the end of the coverage period. Based on the quota share negotiated as a part of the contract, the state pays a portion of costs in excess of the premiums and the insurance company absorbs a portion of the costs. Except for the limited quota share liability of the contractor, the state remains liable for all benefit costs and administrative expenditures. Market Incentives in an HIO Provide No Apparent Improvement in Cost Management Performance The HIO has been promoted as a tool to help states limit increases in benefits for Medicaid. The cost savings and avoidances generated by the HIO model are supposed to be the result of private market incentives. Five specific types of cost management activities have been identified as being key to the savings from the insured approach. These are utilization review, benefit limitations, recoveries from liable third-parties, duplicate auditing, and hospital field audit recoveries. A review of federal requirements and the cost management actions in use in Virginia, however, indicates that these five cost management actions are not unique to the HIO model. In fact, all are requirements of federal Medicaid regulations and are in place in Virginia and most other states. So, the key components of HIO cost management are the activities which all states must use in order to comply with federal regulations. And in fact, all of these activities are used by DMAS and its fiscal agent to manage costs in Virginia. The promise of substantial savings from these cost-management techniques was the impetus for a proposal that Virginia consider modifying its Medicaid program to adopt the HIO model of administration. One proposal for the Virginia program has promised savings of $35 million. However, a review of the $35 million in potential savings found that the estimate was not based on any objective analysis of specific improvements which might be made in the administration of the Virginia Medicaid program. Rather, it is a general projection of savings based on the experience in the Texas HIO program. It does not appear to account for the significant cost management efforts already underway in Virginia. Therefore, it should not be considered a valid estimate of the likely impact of implementing an HIO in Virginia. These findings indicate that adoption of the HIO model will not automatically result in cost management improvements. Instead, it appears that the successful performance of any administrative structure in managing benefit costs depends on the specific techniques adopted by the state, and on how well the techniques are implemented by responsible state agencies and program contractors. Program Funding Under an Insured Program May Be Less Stable With the rapid growth of the Medicaid program in recent years, it can be quite difficult to accurately estimate premiums for an insured program. This has been the experience in Texas as a result of a premium structure which was not sensitive to the use patterns of recipient groups. In combination with the quota share incentive structure, the misprojections of premiums makes the funding for the insured arrangement more unpredictable. Program reserves do not appear to have insulated the Texas program from this problem. In 1991, consultants working for the Texas Legislative Budget Board reviewed the Medicaid HIO arrangement and concluded that the existing quota share arrangement was less predictable than self-funding.* Funding of Reserves Will Increase State Budget Outlays One unintended consequence of the insured arrangement is increased state budget outlays. This is the result of the need to build program reserves within the Medicaid trust fund. This is an integral part of any insurance-based approach, and is seen in both of the HIO programs currently operating. The consultants in Texas concluded that the state budget outlays for an insured program will always exceed the outlays for a self-funded program (fiscal agent or self-administered approaches). Investment Performance in the HIO May Be Weak and Contrary to Existing State Law The investment of funds in the various accounts used to manage the payment of Medicaid benefits is an important issue because of the amount of the funds involved. The HIO is cited as providing enhanced opportunities for investment earnings because of accelerated investment of federal and state funds in the trust account. In Texas, however, the performance of investments in the HIO has not been as good as that for other Texas funds invested by the state. In Virginia, the performance of State investments has also been better than the rate guaranteed by the typical HIO arrangement. Additionally, to the extent that premiums might be considered public funds even after payment to the contractor, investment of those funds by the contractor could require revisions to the statutory provisions for investment of State funds in Virginia. Under the current law, it does not appear that the management of Medicaid trust fund investments by a private contractor would be permitted. The Benefits of the HIO Arrangement Appear Questionable These concerns raise serious doubts about the usefulness of the HIO as a means to better manage the Medicaid program in Virginia or to contain program costs. In conclusion, therefore, the HIO cannot be viewed as a quick fix for escalating Medicaid benefit costs. Further, the substantial costs and disruption to the program in order to implement an insurance arrangement appear unwarranted given the limited nature of any benefits likely to be achieved. It does not appear appropriate for Virginia to consider modifying the basic administrative structure of Medicaid at this time. Recommendation. The State should retain the fiscal agent administrative structure for the Virginia Medical Assistance Program. __________________________________ * As a result of significant funding shortfalls in the Medicaid program, the Texas Legislative Budget Board contracted with Lewin-ICF, a nationally recognized health care consulting firm, for an evaluation of the HIO arrangement in Texas. The Lewin-ICF report ("Evaluation of Medicaid Financing Options," Final Report, July 1, 1991) has been used by the State of Texas to modify the Medicaid HIO. This report is available for review in the JLARC offices. |
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