Markets at Risk— Current and Future Challenges in a Managed Care Marketplace. E. Public sector purchasing.


The picture for public sector purchasing is a troubled one in the face of the market place developments noted throughout this paper. The circumstances and scenarios for the Medicare and Medicaid programs are so different that they are addressed separately. But there is a common overarching concern that health plan contracting in the public sector carries with it exceptional uncertainty—an uncertainty that a growing number of predominantly commercial plans are choosing to avoid. This “public sector risk factor” emanates from the essential features of doing business with public purchasers and the added requirements, processes, and compliance concerns this represents. In addition, because of volatility in public budgets and budget processes, payment methods and amounts may seem less predictable. But certainly the added burden of vilification that health plans in general have experienced, and in particular among those that participated but then withdrew from public programs, the prospects of returning to these lines of business seem remote.

Medicaid managed care experience reveals a widening gap between states that have achieved relatively strong and successful experience with prepaid health plan contracting, and those that have tried and failed in this realm, or who have chosen not to pursue this form of managed care at all. For states with full-risk programs, broader changes in the products in the managed care industry and the shift toward more cost-sharing will make it harder for them to find what they want to purchase. In addition, sharply rising commercial premiums will mean more pressure on states to provide comparable rate increases for the Medicaid product. If they cannot meet rate increase demands, Medicaid agencies may have to respond by reducing some administrative requirements or find them selves increasingly contracting with Medicaid-only plans that cannot leave the program because it is their sole line of business. The industry- wide shift toward products with more cost participation presents additional cause for concern for Medicaid because of the nature of its eligible population. For states that do not or cannot do prepaid programs, the major challenge will be to devise alternative models that afford some of the benefits of care coordination and cost management while retaining fee-for-service payment or experimenting with novel risk models.

In the Medicare realm, the failure to develop the expected menu of alternatives to traditional Medicare as envisioned under Medicare+Choice has been disappointing. It suggests that promoting innovation and sustaining alternatives is much more challenging that originally expected by policymakers. The withdrawal of plans in Medicare is likely to continue in the absence of major changes in program requirements or payment methods, including substantially increasing payments to plans. Beyond just the dislocation and disgruntlement that withdrawals have engendered among plans and beneficiaries, two other factors seem pertinent. There has been a dramatic loss of momentum among beneficiaries and providers that once seemed to indicate that Medicare HMO enrollment was inevitable for a very larger percentage of the Medicare population. The pace of growth both primed beneficiaries for such a transition, and also signaled to providers to join (or form) Medicare HMO networks, or run the risk of losing access to current Medicare patients. The stalling in program growth has reversed this psychology among providers, who now seem quite certain that Medicare HMOs are no longer a major threat to the status quo. A second, more tangible example of provider pushback, described earlier, is the refusal of providers to accept terms such as downstreaming of risk from Medicare plans. Insofar as many plans feel that this product only can work if providers accept risk-sharing (having “skin in the game” as they characterize it), resistance to risk is a major impediment to be overcome. Provider consolidation further counteracts the ability of plans to negotiate favorable terms. This situation makes it very doubtful that plans can regain enough leverage to improve their positions with providers and thus Medicare HMO products remain at considerable future risk.