Four out of Five States Now Have Medicaid Managed Care. What Does That Mean?


On March 1, the state of Iowa will move its Medicaid programs into a managed care system. Iowa joins thirty-nine other states who have managed care programs for their state Medicaid. The shift to managed care comes as the dramatic rise in healthcare costs has pushed states to consider alternatives to the traditional fee-for-service reimbursement system.

Under fee-for-service reimbursement, healthcare providers are paid based on the services provided. Each service has an agreed-upon reimbursement level and the provider receives that reimbursement once the service has been provided. Fee-for-service reimbursement ties payments to specific services provided, much the same way a restaurant receives payment for delivering a meal.

But what if the meal the restaurant delivers isn’t very good? You would send it back and the chef would alter the meal to your satisfaction, perhaps by cooking it longer or altering the spices. Suppose you sent the meal back five times for corrections. When you received your bill, would you expect to be charged for five separate meals? Of course not. In fact, you would complain loudly if the restaurant attempted this. When you eat out in a restaurant you are paying for the expected outcome (a good meal) and not for the efforts of the restaurant to deliver that meal.

One of the problems of fee-for-service reimbursement is that every service is reimbursed, regardless of cause. A poorly performed service that requires additional care is reimbursed for additional money. To use the restaurant analogy again, every time you send your meal back for adjustments you are charged an additional service fee. Now imagine the waiter, whose tip is based on the total dollar amount of the bill. The waiter has an incentive to urge you to keep sending your meal back, each time adding a new charge to your bill, thereby increasing his own income.

The shift to managed care for Medicaid changes the reimbursement incentive. Instead of being paid for individual services, providers are reimbursed a fixed amount per member per month. Now the incentives have switched. Rather than urge you to send your meal back multiple times, the waiter in this scenario will advise you not to send your meal back at all. Or, better yet, to stay out of the restaurant altogether. Under managed care, the provider is incentivized to limit services. The expectation is that patients will receive preventive services that reduce or eliminate more expensive interventions later on. As the managed care population becomes healthy and remains healthy, all parties benefit: the Medicaid program reduces cost, the provider receives adequate income, and the patients are healthier.

Under managed care models, patient case management becomes a vital service. Case management helps ensure that the right patient receives the right treatment at the right time. Case managers can help patients take advantage of less expensive preventive services to avoid more intensive services as problems escalate. Case managers can also help ensure patients are seen and treated within reasonable time frames so that delaying services does not become the cost control mechanism of managed care.

Managed care can be an important tool for Medicaid programs to reduce the cost of healthcare services. Iowa projects cost savings of $51 million in the first six months of the switch to managed care. When combined with patient case management services, Medicaid managed care programs can achieve their goal of reduced cost and improved health outcomes.

For more information, check out our whitepaper “The Role of Case Management in Value-Based Healthcare.”

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