Better Care Reduces Health Care Costs (2024)

Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Introduction

In California, the federal Medicaid program is administered by the stateDepartment of Health Services (DHS) as the California Medical AssistanceProgram (Medi-Cal). The funding of the program is shared about equally by thestate General Fund and by federal funds.

While the largest group of beneficiaries is families and children, adisproportionate share of Medi-Cal spending (64percent) is for the agedand disabled (includes the blind), as shown in Figure1. That is becausethe aged and disabled typically have more intensive needs for expensive medicalservices such as prescription drugs, inpatient hospital care, and long-termcare.

More than a decade ago, the Medi-Cal Program and Medicaid programs in manyother states began placing children and nondisabled adults in managed caresystems as a way to reduce benefit costs. Relatively few aged and disabledbeneficiaries however, were initially included in managed care. Since thattime, other states have stepped up their efforts to enroll aged and disabledpersons in managed care as a way to better manage their care and to helpcontain program costs. However, with some notable exceptions discussed later inthis analysis, California has not yet followed that path.

The Governor's 2004-05 budget plan outlines a concept for a wide-rangingreform of the Medi-Cal Program, including an expansion of the existing systemof managed care, beginning in 2005-06. While the administration's reformproposal endorses the idea of an expansion of managed care to aged or disabledbeneficiaries, it focuses on a proposed geographic expansion of coverageprimarily for families and children.

In this analysis, we describe the current Medi-Cal health care deliverysystem and evaluate its strengths and weaknesses in regard to addressing thehealth care needs of the aged and disabled. We discuss which additional groupsof aged and disabled Medi-Cal enrollees could receive care from managed careplans. We recommend: (1)the enactment of legislation directing DHS togradually shift an estimated 330,000 aged or disabled individuals we haveidentified as appropriate candidates from fee-for-service Medi-Cal to a managedcare system, and (2)strengthening the existing Medi-Cal managed caresystem to address problems that limit the ability of DHS to ensure access toservices and quality of care.

The Medi-Cal Health Care Delivery System

Medi-Cal provides health care coverage through two basic types ofarrangements—fee-for-service and managed care. Participation in managed care isgenerally voluntary for the aged and disabled.

Medi-Cal Fee-for-Service System

Medi-Cal began as a fee-for-service health care delivery system. In afee-for-service system, a health care provider receives an individual paymentfrom DHS for each medical service delivered to a Medi-Cal beneficiary.Beneficiaries generally may obtain services from any provider who has agreed toaccept Medi-Cal payments. This model exists in all counties in California anddoes not typically provide for the coordination of care for beneficiaries whohave several medical providers.

Medi-Cal Managed Care

Legislation enacted as part of the 1992-93 Budget Act gave DHS broadauthority to implement a different system of medical care for Medi-Calbeneficiaries—managed care. Under this system, DHS contracts with health careplans, also known as a health maintenance organizations (HMOs), to providehealth care coverage for Medi-Cal beneficiaries residing in certain counties.The health plans are reimbursed on a "capitated" basis with a predeterminedamount per person, per month regardless of the number of services an individualreceives. The health plans in return assume financial risk, in that it may costthem more or less money than the capitated amount paid to them to deliver thenecessary care. In contrast, fee-for-service providers assume no financialrisk, in that they are reimbursed for each service after it is delivered.

Figure2 identifies the three types of Medi-Cal managed care systemsthat operate in California. Figure3 shows that 22 of the state's 58counties—generally those counties with greater populations—operateMedi-Calmanaged care systems. County Organized Health System (COHS) plans operate ineight counties, the Two-Plan Model operates in 12 counties, and GeographicManaged Care (GMC) systems operate in two counties. These managed care plansare similar to those offered by many public and private employers. Managed careis not available in 36 mostly rural counties where Medi-Cal beneficiariesexclusively receive their medical care from fee-for-service providers.

Over time, the proportion of Medi-Cal beneficiaries enrolled in managed carehas grown significantly. About 3.3million, or 52percent, of allMedi-Cal beneficiaries received health care services from a managed care planas of June 2003. The remainder received care from fee-for-service health careproviders.

Mandatory and Voluntary Participation in ManagedCare

Most families and children residing in counties operating Medi-Cal managedcare systems are required to receive care from health plans. The aged ordisabled in those same counties generally have the option of participating ineither the fee-for-service or managed care system. Typically, few have chosenmanaged care. As a result, most managed care enrollees continue to be familiesand children. The exception is the eight COHS counties, where nearly allMedi-Cal beneficiaries are required to receive their care from a COHS plan.

These program rules, which are summarized in Figure4, explain thevariance in participation rates for different groups of Medi-Cal beneficiariesin managed care and fee-for-service medicine. Families and children are about58percent of the population receiving care from fee-for-service providersand the remaining 42percent are aged or disabled, as shown inFigure5. An overwhelming majority of the population enrolled in managedcare, 91percent, consists of families and children, while only9percent of the population in managed care is made up of aged or disabledbeneficiaries.

Managed Care has Proven Advantages Over theFee-for-Service System

During its period of steady expansion over the past decade, Medi-Cal managedcare has proven to offer some significant advantages over fee-for-servicecoverage in regard to coordination of patient care, quality and access to care,and containment of program costs. These advantages are summarized inFigure6 and discussed in more detail below.

Coordination of Services to Improve Health Outcomes

Fee-for-Service System Provides Fragmented Care. Under thefee-for-service system, patients receive care from a fragmented collection ofproviders and do not have a primary care provider to coordinate their healthcare. Essentially, patients must act as their own care coordinator, orattempt to find someone who can assist them in making medical appointments anddetermining when they need to see a specialist. In addition, enrollees infee-for-service sometimes lack basic information about what services they areeligible for, which makes them less likely to use preventative care andspecialized services.

Managed Care Has Provided Coordinated Care. Managed careenrollees may choose their own primary care physician, or otherwise will haveone assigned to them, who has access to their medical history, will coordinatetheir health care, and is authorized to provide their patients with access toother more specialized services as necessary. Under this arrangement, aged anddisabled beneficiaries have been more likely to receive prevention-orientedcare meant to slow the progression of specific diseases and help them tomaintain their good health according to studies we have reviewed. This careoften includes behavioral health services, prescription drugs, durable medicalequipment, physical therapy, in-home supportive services, and long-term care.

Quality of Care

Quality of Fee-for-Service Care Is Unknown. The DHS does notregularly attempt to monitor and measure the quality of care that is deliveredby fee-for-service health care providers. The state, in effect, assumes that ifMedi-Cal beneficiaries do not like the quality of care they receive from onefee-for-service provider, that they can seek out another. However, thisassumption does not take into account the possibility that the number offee-for-service providers participating in the Medi-Cal Program could beinsufficient (due to relatively low reimbursem*nt rates for some services) togive Medi-Cal beneficiaries a real opportunity to change providers in responseto problems in the quality of their services.

Managed Care Plans Undergo Quality Reviews. The DHS, as partof its oversight of Medi-Cal managed care plans, conducts quality reviewsannually to measure health plan performance in regard to the quality ofservices provided to Medi-Cal beneficiaries. These studies include thecollection and annual public reporting of data measuring their performanceaccording to Health Plan Employer Data and Information Set quality indicators.The DHS contracts with private companies to conduct a Consumer Assessment ofHealth Plans Survey (CAHPS) of patients to obtain standardized informationabout Medi-Cal members' experiences with their health plans. In addition,Medi-Cal managed care plans are rated by the Department of Managed Health Care(DMHC), the state agency which regulates HMOs. The DMHC publishes informationregarding their quality in an annual Quality of Care Report Card that isavailable to the public on the Internet.

Access to Providers

Patient Access to Fee-for-Service Providers Is Unknown. Accessto medical care is often a significant concern for aged or disabled patientsbecause they typically have more intensive medical needs. However, DHS does notregularly monitor or collect information measuring patient access, such as howlong it takes Medi-Cal patients to obtain an appointment with a fee-for-serviceprovider. In fact, the patient information that DHS obtains fromfee-for-service claims for payment from providers lacks data that could be usedto measure their access to health services. One reason for concern is thatseveral reviews of Medicaid programs in other states have found that aged anddisabled patients receiving care from fee-for-service providers wait longer forappointments and travel further for care than those enrolled in managed care.

Managed Care Improved Access. Under program rules, Medi-Calpatients enrolled in managed care must be ensured access to a network ofprimary care and specialist health care providers. Health plans licensed by thestate are required to comply with various state standards to ensure timelypatient access to care. Federal law further requires that Medicaid managed careplans take specific steps to help potential enrollees in Medicaid to understandtheir health care benefits. For example, health plans must make available freeinterpretation services for enrollees who are not fluent in English and topublish health plan information in the prevalent non-English language in thearea. Providers participating in the Medi-Cal Program on a fee-for-servicebasis are not subject to these requirements. A recently published nationalstudy found that shifting Medicaid persons to a managed care setting improvedtheir access to primary care physicians and specialists.

The Medi-Cal managed care system, if not carefully monitored and structured,also has the potential to hinder access by patients to certain medical servicesin order to reduce costs. For example, a managed care plan could regularly denytreatment requests for legitimate treatments or assign a large number ofMedi-Cal patients to providers making access to service difficult. However, thestate has some safeguards in place, such as CAHPS, to detect the failure ofmanaged care health plans to provide necessary services. In addition, DMHC regulationsgenerally prohibit HMOs from denying patients necessary medical care that is apart of coverage, and Medi-Cal contracts with health plans in the managed caresystem are specific about the obligations of plans to provide these services.

Cost Containment

Fee-for-Service Lacks Incentives to Contain Costs. The Medi-Cal fee-for-service system generally allows patientsto receivecare from any number of providers as frequently as they wish. While providersof hospital and long-term care services are required to submit treatmentauthorization requests (TARs) to DHS for approval, physician services and thosebilled by many other types of providers generally do not require authorizationthrough the TARS process. Thus, no process is in place to ensure that thehealth care services patients received were medically necessary. Also, there islittle incentive for providers to deliver preventative care that might reducethe future use of health care services by their patients, and incentives existthat tend to increase program costs—providers make more money the more servicesthey deliver and bill to the state. This arrangement can lead to theunnecessary or preventable utilization of costly emergency room services, aswell as the duplication or overspending on a wide variety of medical services.

Managed Care Has Reduced Costs and Limited Deficiencies.Enrolling Medi-Cal beneficiaries in managed care instead of fee-for-service fortheir health care has resulted in significant savings to the state. While thedata to exactly calculate these savings is not publicly available, DHS hasestimated that the three types of managed care plans cost the state between81percent and 87percent of what would otherwise have been spent onpatients if they were in fee-for-service medicine. We estimate that the stateis probably saving in the hundreds of millions of dollars annually on patientcare because of the shift of beneficiaries into managed care.

The Medi-Cal managed care system has saved money for the state because the capitationrates paid to plans result in an average cost of care per Medi-Cal beneficiarythat is less than the equivalent cost of fee-for-service coverage. The plansprovide health care services for a lower cost and stay within their capitationrates in part by better coordinating patient care, such as offering prenatalcare that subsequently saves on emergency room costs, and by providingpreventative care, such as tobacco cessation programs. The plans also help tocontrol the duplicative or unnecessary use of medical services. Thefee-for-service system, in contrast, generally allows patients to receivecare from any number of providers as frequently as they wish, and does notnecessarily ensure that the health care services they do receive are the onesthat are medically necessary.

Additional Persons Could Be Enrolled in Managed Care

Our analysis indicates that an estimated 310,000 aged and disabled persons,out of the total of about 1.5million participating in Medi-Cal in 2003,are good candidates for a shift from fee-for-service to managed care. Webelieve this shift could both improve their care and result in a reduction inMedi-Cal expenditures for the state. We found that other aged and disabledpersons are not currently good candidates for managed care, although theirintegration into managed care should be considered at some point in the future.We also found that some specific types of medical services needed by many agedand disabled patients should probably continue to be provided separately andnot become a part of a managed-care delivery system.

Who Could Shift to Managed Care?

We estimate about 310,000 aged and disabled persons now participating inMedi-Cal could be shifted from fee-for-service to managed care in the near term(that is, within about the next two years). The majority of these persons aredisabled adults; however the group also includes some disabled children andaged persons. (Figure7 summarizes how these groups are defined inMedi-Cal Program rules.) Our analysis indicates that this group of Medi-Calbeneficiaries presents the best opportunity for the state to improve their careand to save on program costs. This group would present the fewest difficultiesin terms of coordinating their care with other state, federal and localprograms that serve their need for medical and social services.

We also found significant, unresolved coordination of care issues exist, atleast for now, which mean that many other aged or disabled Medi-Calbeneficiaries currently are not the best candidates for transfer to coverageunder managed care. In addition, we have concluded that, even for some personsshifted to managed care, some of their specific types of health services shouldcontinue to be provided outside the managed care network at this time. Wediscuss our findings in more detail below.

Focus Initially on Certain Aged or Disabled Persons

As noted above, we have identified an estimated 310,000 aged or disabledindividuals who currently receive medical care through the Medi-Calfee-for-service system as strong candidates in the near term for an expansionof managed care. Based on an analysis of current caseload trends, we estimatethis number would grow to 330,000 by 2006-07. The majority of this groupconsists of disabled adults below the age of 65 with physical disabilities,developmental disabilities, psychological illnesses or chronic medicalconditions. This group would also include some aged persons and disabledchildren. Not included in our estimate are about 140,000 aged or disabledindividuals with a variety of health care needs who are already enrolled inmanaged care, particularly in the COHS counties, but also in the Two-Plan andGMC counties.

Shift to Managed Care Problematic for Some

Many aged and disabled Medi-Cal beneficiaries are simultaneously eligiblefor an array of other types of medical and social services both inside andoutside of Medi-Cal. Our analysis indicates that the enrollment of about1.2million of these Medi-Cal beneficiaries into managed care could beproblematic at this time. One reason is that such a shift in the provision oftheir physical health care would be more difficult to coordinate with the carethey receive under various federal, state, and local programs. Also, Medi-CalProgram rules mean certain individuals are not the best candidates forinclusion in a managed care system at this time.

We have identified four specific groups of Medi-Cal beneficiaries that webelieve are not the best candidates in the near term for enrollment inmanaged care.

• "Dual Eligibles." There are about 900,000 individuals who are simultaneously enrolled in Medi-Cal and the federal Medicare program. Medi-Cal generally pays the Medicare premiums, deductibles, and any co-payments for these dual eligibles, and Medi-Cal pays for services not covered by Medicare, such as long-term care. Dual eligibles are not now a good fit for Medi-Cal managed care because they would remain entitled to receive Medicare services outside of the Medi-Cal managed care network. As a result, coordination of program enrollment, payments to managed care plans, and oversight would be complicated for these beneficiaries.
• Share-of-Cost Eligibles. These are individuals with relatively higher incomes (typically from 100percent to 133percent of the federal poverty level) who are enrolled in Medi-Cal only in months in which they have paid a specified amount out of pocket toward their own health care. Because share-of-cost eligibles tend to go on and off the Medi-Cal rolls on a month-to-month basis, it would probably be difficult for health plans to coordinate their care on an ongoing basis.
• Medi-Cal Enrollees Receiving Long-Term Care. In general, placing aged or disabled individuals who require nursing home or other forms of long-term care into a managed care arrangement would be a complex task. Health plans would generally need to create new long-term care networks to serve such beneficiaries. Given the difficulty of such an expansion, we believe it could not be completed within two years. In addition, such a change would run contrary to the longstanding legislative goal of counties developing an integrated system of long-term care that includes both medical and social services for the aged and disabled.
• California Children Services (CCS) Beneficiaries. Some children enrolled in Medi-Cal also participate in CCS, a joint state-county program that provides specialty health care services for children with serious illnesses. Requiring CCS children to enroll in managed care at this time could be problematic. This is because existing program rules require that counties approve treatment for CCS-related health conditions, and provide for treatment by providers outside of the managed care network. Determining whether a health plan or CCS was responsible for payment for services for such children would also probably be a problem because of the overlap in responsibilities between the county and health plan for their care.

While we believe these groups are not good initial candidates for inclusionin managed care, it is possible that future changes in federal and state lawand program rules could someday make it possible for some or all of these beneficiariesto be integrated into such a medical system. Also, we have identified somesignificant problems in the administration of Medi-Cal managed care that couldaffect efforts to expand coverage now to the aged or disabled. We discuss theseproblems in the shaded box on the next page, and later in this analysis suggestways to address these problems in order to facilitate the transfer of certainaged and disabled persons to managed care.

Some Services Best Excluded From Managed Care

In addition to considering which groups of Medi-Cal beneficiaries are thebest candidates for inclusion in a managed care system, we also examined whatbenefits appropriately belong in the state's managed care benefit package. Wegenerally concluded that, in at least the near term, no changes are warrantedin the list of benefits that are typically included in managed care benefitpackages.

This means that certain services would continue to be "carved out"or excluded from the list of benefits provided by health plans. The list ofcarved-out services, which would continue to be provided as they are today byother governmental entities or specialized providers, includes mental health,alcohol and drug treatment, adult day health services, and dentistry, inaddition to many others.

In theory, shifting some of these currently excluded services into a managedcare benefit package could have some advantages. For example, incorporatingsubstance abuse treatment or mental health services into managed care couldresult in better linkages between primary care physicians and other providerswho specialize in providing such treatment services. However, complicated andtime-consuming changes in portions of the state's health care delivery systemwould be necessary to modify managed care benefits in this way. Moreover, someof these changes would run contrary to existing state policy. For example,shifting the care of Medi-Cal beneficiaries who receive mental health servicesfrom the counties to managed care plans would run counter to the state's priordecisions to consolidate such services at the county level. For these reasons,we recommend that the Legislature not include these services in managed care atthis time.

Shift to Managed Care Would Result in State Savings

As discussed earlier in this analysis, managed care has already proven to bean effective strategy in helping to contain state costs for the Medi-CalProgram through better coordination of patient care and broader implementationof preventative care approaches. Our analysis indicates that additional savingsto the state would be possible if the estimated 310,000 aged or disabledpersons thatwe have identified as strong candidates for such a shiftwere gradually transferred from the fee-for-service system to managedcare. We estimate that, while the state might incur some modest increases inadministrative and benefit costs in the short run, the net additional savingsto the state General Fund from such a change would probably exceed$100million upon full implementation by 2006-07.

Key Assumptions

Our savings estimate is based on the assumption that the 310,000 personsthat we have identified as candidates for a shift to managed care do so in thenear term. We estimate that the total would grow to 330,000 by 2006-07, theyear the change could first be fully implemented. This number excludes dualeligibles, share-of-cost beneficiaries, persons receiving long-term care, andchildren in the CCS program. Our estimate also takes into account the fact thatsome beneficiaries in this group have already voluntarily enrolled in managedcare. It also does not include beneficiaries in the largely rural countieswhere such plans do not now operate and are unlikely to do so in the near term.

Our estimate further assumes that DHS would be able to implement theproposal with a relatively small number of additional state staff and a limitedadditional amount of funding because the department already has existing staffdedicated to administering the managed care portion of the Medi-Cal Program.Moreover, we assumed a phased and gradual implementation of this change thatwould be more manageable for DHS staff and that would take up to 24 months.This includes 18 months of planning (although it may be feasible to beginshifting some persons to managed care earlier than that) and a six-monthphased-in transition of new enrollees and beneficiaries from fee-for-service tomanaged care.

Our estimates assume that the costs for managed care health plan coveragewould be in line with our estimate of the existing per beneficiary paymentsunder COHS plans. We compared these estimated COHS plan costs with the amountsthe state now pays for these beneficiaries under the fee-for-service system.For example, the average annual fee-for-service cost for an aged beneficiarywas about $5,000 in 2002-03, with the annual cost for a disabled beneficiary atabout $7,100. By way of comparison, we estimated that the average annual costof an aged beneficiary enrolled in a COHS plan that same year was significantlyless—about $4,200 for an aged beneficiary and $6,200 for a disabledbeneficiary.

As noted above, we based our cost comparison on estimated COHS plan costs.We did so because COHS plans are the only ones that now largely cover theentire aged or disabled population within their coverage area, and thus wouldprovide the best indicator of the actual cost of providing services to the agedor disabled. Had we based our estimate on the rates paid to GMC and Two-PlanModel health plans, which receive lower reimbursem*nt rates than COHS plans,our projected savings would have been greater.

LAO Estimate of Net Savings

Based upon these assumptions, we estimate that the state would achieve netGeneral Fund savings of more than $100million annually ($200millionsavings annually for all fund sources) by 2006-07. These savings would grow insubsequent years in line with growth in caseload and costs. Our estimate ofcaseload and state savings from expanded enrollment in managed care issummarized in Figure8.

The actual level of savings could be greater or lower than we haveestimated, depending primarily on the capitation rates that the departmenteventually determined should be paid to managed care plans as part of theexpansion. Financial instability encountered by COHS plans and litigationbetween various health plans and the state over rates have raised concernsrecently about the adequacy of current capitation rates. To the extent thatthese factors resulted in increased rates, the savings from a shift to managedcare could be less than we have estimated.

We would also note that an increase in utilization of some medical servicesby health plan members could occur as a result of their shift to managed care.For example, some aged and disabled enrollees who had been having difficultygaining access to specialists through the fee-for-service system might receivereferrals to such services after their enrollment in managed care, therebyincreasing health plan costs for Medi-Cal patients. The extent of these costsare not known. However, we believe an initial increase in utilization of somemedical services would probably be more than offset in the future by thesavings achieved by improved coordination of patient care and the greaterprovision of preventative services.

A Blueprint for Expanding Aged or DisabledEnrollment in Managed Care

As it operates today, the Medi-Cal Program offers a paradox: the aged anddisabled who potentially stand to benefit the most through the improved healthcare that can come from a shift from fee-for-service medicine to managed careare the very population that has largely been excluded from the arrangement.Moreover, the most costly groups in terms of their health care costs, for whomthe state has the greatest opportunity for containing expenditures in Medi-Calexpenditures, has not been targeted for managed care programs. Meanwhile, theleast costly group to the state in terms of health care coverage—families andchildren—is generally mandated to participate in managed care health coverage.

To better address the distinctive health care needs of the aged and disabledenrollees in Medi-Cal, and to achieve long-term savings to the state likely toexceed $100million annually, we recommend the enactment of legislationdirecting DHS to gradually shift the populations we have identified asappropriate candidates from fee-for-service providers to a managed care system.While DHS has the authority today to accomplish this change, we believe it isappropriate for the Legislature to provide the department with policydirection. We further recommend that the Legislature direct DHS to take aseries of specific steps to improve the administration of the Medi-Cal managedcare system to ensure adequate oversight and quality of care.

As our findings in this analysis indicate, a carefully targeted expansion ofenrollment in managed care could yield a number of benefits, including improvedcoordination of care; increased access to care; a greater emphasis onprevention, quality assurance, and improved outcomes; and potentiallysignificant state savings. A "blueprint" for moving forward withthese changes is discussed in more detail below.

Implement Gradual Shift of Some Aged or DisabledInto Managed Care

We recommend enactment of legislation directing DHS to prepare and implementa plan to gradually shift certain aged and disabled Medi-Cal beneficiaries incounties where Medi-Cal health plans already exist into managed care. Inkeeping with the findings of this analysis, Medi-Cal beneficiaries who are dualeligibles, have a share of cost, receive long-term care, or are enrolled in CCSwould not be mandated to receive their health care from the managed caresystem. Accounting for expected caseload growth in the next several years, weestimate that approximately 330,000 individuals enrolled in fee-for-servicemedicine would eventually be affected by such a policy change.

Such an expansion of the Medi-Cal managed care system would require a changein the state's Medicaid plan, and thus would be subject to federal approval. Webelieve the state is likely to receive this federal approval, given that acomparable group of Medicaid beneficiaries are already part of the managed caresystem in California and in other states.

The state would also have to change its Medi-Cal enrollment process so thatthe beneficiaries meeting the criteria discussed above are required to enrollin a managed care plan. We recommend that the shift of individuals into managedcare commence with new enrollees, then gradually expand to include thosealready enrolled in Medi-Cal in the fee-for-service component of the program.

Maximizing the Chances for a Successful Expansion

Our analysis suggests a transition of additional beneficiaries to theMedi-Cal managed care system is more likely to be successful if the stateadopts several key implementation strategies. We summarize these strategies inFigure9 and outline them below.

Build on the Existing System. An expansion is more likely tosucceed if it builds upon the existing system in the 14 counties (excludingCOHS plans) where Medi-Cal managed care is currently available and where healthplans (GMC and Two-Plan models) are already available to support the expansion.

Involve Stakeholders. A transition to managed care is morelikely to be accepted by those affected if DHS receives early and broad-basedadvice from health plans, direct medical providers, Medi-Cal beneficiaries,health advocacy groups, and other parties with an interest in health care foraged and disabled persons. Such a collaborative effort should enable thedepartment to identify problems and help to ensure that patients' needs areaddressed. This could be accomplished through the stakeholder involvementprocess discussed in the Governor's 2004-05 budget proposal to reform theMedi-Cal Program.

Ensure Readiness for Expansion. The DHS should be directed bystatute to include in its regular reviews of health plans an assessment oftheir systems to identify enrollees with significant medical needs. Forexample, the reviews could ensure that health plans develop care coordinationplans for aged and disabled beneficiaries with significant health care needs.The DHS should also ensure that the provider networks established by the healthplans are adequate to meet the specific medical needs of the aged and disabled.

Educate Beneficiaries and Providers. The DHS should bedirected by statute to develop and distribute information to beneficiariesabout how managed care plans work and to advise health care providers on bestpractices for managing the aged and disabled population.

Share Information on Best Practices. The DHS should bedirected by statute to develop a formal process for the communication of bestpractices for caring for aged and disabled beneficiaries among Medi-Cal managedcare plans. As a starting point, DHS could examine the practices of COHS planswho now serve many aged and disabled clients. (See the shaded box on the nextpage for a discussion of examples of COHS best practices in this regard.) Thestate should also consider requiring (by contract) that health plans considerand, where appropriate, incorporate these best practices into their health caresystems.

Strengthen the Existing Managed Care System

Our review found weaknesses in the administration of the Medi-Cal managedcare system that could affect efforts to expand coverage to the aged ordisabled because these problems limit the ability of DHS to ensure access toservices and quality of care. We recommend that the Legislature requireDHS to make improvements in the areas discussed below to ensure adequateoversight of Medi-Cal managed care plans.

Ensure That the Data Collection System Is Effective. Thedepartment needs to improve its data collection system to safeguard state fundsspent on those enrolled in managed care. The Legislature should require DHS tobegin and complete the independent assessment and corrective action plan thatthe Department of Finance (DOF) required DHS to undertake in July 2003 andrequire DOF to share the results with the Legislature. Using this information,the Legislature can consider what further action to take.

Reform Capitation Rate-Setting Process. The Legislature shoulddirect DHS to reform the process for setting rates for capitation payments paidto Medi-Cal managed care plans, particularly for their aged and disabledpopulations. This would begin with the steps outlined above to improve theManagement Information System/Decision Support System. Additionally, DHS couldprovide incentives to encourage health plans to submit more complete andaccurate data to the state. The improved data would be used by DHS to develop moreappropriate capitation rates.

It is not clear at this time whether these changes would result in a netincrease or decrease in Medi-Cal capitation rates. It may be necessary toconsider such changes even if they would result in an increase in state expendituresin order to ensure continued financial stability in the Medi-Cal managed caresystem.

Require Health Plans to Conduct Health Assessments. TheLegislature should require that all state contracts for Medi-Cal managed caredirect health plans to conduct health assessments for all new enrollees. Webelieve this approach would help to ensure that plans have mechanisms in placeto identify beneficiaries in need of intensive care management or specializedcare.

Develop Quality Indicators for the Aged and Disabled. As notedearlier, the Medi-Cal managed care system currently lacks performance measuresto address the medical conditions of the aged and disabled. The Legislatureshould require DHS, in consultation with the advisory committees we haveproposed, to develop performance measures that are specific to this populationof beneficiaries. Health plans should also be required to establish systemsthat monitor the availability and utilization of prescription drugs, durablemedical equipment, home health care, and physical therapy and develop protocolsto ensure treatment for certain conditions.

Consider Effects on the Health Care "Safety Net."Shifting aged or disabled persons in Medi-Cal to managed care could affecthospitals providing "safety net" assistance to the indigent as wellas Medi-Cal patients. That is because such a shift would reduce the number ofdays aged or disabled patients would spend in these hospitals because of theirgreater access to primary care physicians, the greater provision ofpreventative services to these individuals, and the likelihood that managedcare plans would use other hospitals to provide inpatient services for theseMedi-Cal patients. The impact of these changes is significant, especially sincea shift in Medi-Cal patient caseload away from "safety net" hospitalscould also affect their receipt of certain federal funding.

Conclusion

While most Medi-Cal Program spending is for aged and disabled beneficiaries,more could be done to ensure the quality and cost-effectiveness of the carewhich this population now receives. Our analysis has found that managed carehas the potential to both improve health care outcomes for the aged anddisabled and to achieve significant long-term savings for the state. Werecommend that as many as 330,000 aged and disabled persons move to managedcare by 2006-07 and that specific improvements to the existing system ofmanaged care be made.