Overview of Medicaid Managed Care Provisions in the Balanced Budget Act of 1997

11. Implications For Safety Net Providers

Medicaid’s transition from fee-for-service to managed care has enormous implications for safety net providers – those hospitals and clinics that deliver basic health care to large numbers of the uninsured. Medicaid has been a major revenue source for many of these providers, because it has reimbursed for the care and services they deliver to low-income patients who, without Medicaid coverage, generally would have no other source of payment. The revenues from these Medicaid patients often allow these hospitals and clinics to maintain the staffing, equipment, and other capacity to serve the uninsured. Loss of some or all of these Medicaid revenues due to lower payment rates for beneficiaries or to their diversion elsewhere could lead to the contraction of service capacity or, in extreme cases, closure of safety net facilities. As a result, the uninsured in these communities will have much greater difficulty in accessing needed care.

Current state practices and policies with respect to safety net providers vary. A 1996 survey by the National Academy of State Health Policy found that, in the 38 states with Medicaid risk contracting programs, 30 states reported that federally-qualified health centers participated as contractors or subcontractors in these programs; 22 states reported that community health centers or rural health clinics participated; and 256 states reported that local health departments participated. The survey found that few states reported requiring Medicaid MCOs to contract with any particular safety net providers.58

The Balanced Budget Act does not articulate a clear policy for the support of safety net providers. It contains some provisions intended to give states the ability to reduce Medicaid payments to these providers, and it contains some provisions intended to protect these providers from harm at the hands of Medicaid MCOs. The policies toward “safety net” hospitals differ from those toward “safety net” clinics. In each case, the real-world impact of these changes will vary from community to community and state to state.

Disproportionate Share Hospitals

The Balanced Budget Act contains a number of provisions designed to achieve federal savings by reducing Medicaid reimbursement to hospitals generally, and to “disproportionate share” hospitals like public and children’s hospitals in particular. The Act repeals the so-called Boren amendment, which required “reasonable and adequate” payments to hospitals for inpatient care delivered to Medicaid patients. (This change is not likely to have much effect on hospital Medicaid revenues in states with high managed care penetration because, under HCFA interpretation, MCOs were not subject to the Boren amendment in setting payment rates to affiliated hospitals.) The Act still requires states to make additional payments to hospitals serving high volumes of Medicaid or uninsured patients, but it limits the federal Medicaid matching funds available for these DSH payments in each state.59

The Act does not require Medicaid MCOs to contract with DSH hospitals or, if they elect to do so, to pay them any particular rate or to guarantee them a certain volume of patient referrals. In general, the Act leaves it to Medicaid MCOs and DSH hospitals to work out any affiliations, subject to the following constraints. (As in the case of other MCO performance standards, these provisions do not apply in states currently operating section 1115 waivers or under current section 1915(b) waivers.)

DSH Payments

States must make DSH payments directly to DSH hospitals rather than funneling them through MCOs.60 Direct payment is obviously beneficial to DSH hospitals, as it eliminates any possibility of delay or diversion of DSH payments by an MCO.

Emergency Services

Both MCOs and PCCMs must provide coverage for emergency services “without regard to prior authorization or the emergency care provider’s contractual relationship with” the MCO or the PCCM. Emergency services are defined broadly as those needed to “evaluate or stabilize” an emergency medical condition that a “prudent layperson” could reasonably expect to require immediate medical attention. This requirement should protect DSH hospitals from MCOs that might deny payment to unaffiliated hospital emergency rooms for care provided to Medicaid enrollees (even though the cost of that care is part of the MCO’s Medicaid capitation rate). It applies to MCO or PCCM contracts entered into or renewed on or after October 1, 1997.

Timely Payments

MCOs must pay hospitals and other health care providers on a timely basis for services provided to those Medicaid enrollees who are covered under their risk contract with the state. As with state Medicaid reimbursement to fee-for-service providers, timely means that the MCO pays 90 percent of “clean” claims (for which no further substantiation is required) within 30 days and 99 percent within 90 days. This requirement should help protect DSH hospitals from cash flow problems resulting from long delays in payment by MCOs for emergency care or other covered services, whether or not the hospital is affiliated with the MCO whose enrollee it treats.

Default Enrollments

As described in section 4, the Act contains provisions related to “default” or “auto” enrollment in the case of states implementing mandatory managed care under section 1932. These provisions require that states, in the process of enrolling beneficiaries who do not choose among the MCOs offered to them, “take into consideration maintaining . . . relationships with providers that have traditionally served [Medicaid] beneficiaries.” DSH hospitals are not expressly referenced, but they are surely among the providers that have “traditionally” served beneficiaries. In states that implement this provision, it could make DSH hospitals attractive as affiliates to those managed care plans seeking to increase the number of beneficiaries they enroll through the default enrollment process.

Liberalized Solvency Requirements

The Act’s provisions relating to emergency services and timely payments should be helpful to DSH hospitals that are not themselves MCOs. For those DSH hospitals that choose to operate as an MCO, capitalization and cash reserve requirements relating to state insolvency standards for health maintenance organizations or insurers may be a concern. The Act specifies that, as a general rule, MCOs meet state-established solvency standards for private HMOs or be state-certified as a “risk bearing entity.” However, two exceptions are relevant to DSH hospitals. First, any organization that is a “public entity” is not subject to the solvency standards applicable to private HMOs or risk bearing entities; this is obviously relevant to DSH hospitals operated by counties or localities. Second, any DSH hospital, public or private, that qualifies as a “provider-sponsored organization” is exempt from these solvency standards. Presumably, a DSH hospital could qualify as a PSO under the new Medicare provisions in the Balanced Budget Act or under relevant state law.

Federally-Qualified Health Centers

As in the case of Medicaid DSH hospitals, the Balanced Budget Act contains changes designed to reduce federal spending on payments to federally qualified health centers. Among these are federally funded community and migrant health centers, health clinics run by Indian tribes or urban Indian organizations, and urban or rural primary care clinics that meet the requirements applicable to community health centers but do not receive federal grant funds. These requirements include providing primary care services to people living in an FQHC’s service area, regardless of their ability to pay. Though the Act retains the current legal requirement that state Medicaid programs cover the services provided by FQHCs, it phases out the requirement that states pay FQHCs at a rate that fully reflects their costs of delivering care to Medicaid patients. CBO assumes that states will take advantage of this flexibility to reduce payments to FQHCs, yielding some federal savings as well.

Emergency Services

States may choose to cover FQHC services through contracts with MCOs or “carve out” these services from these contracts. In either case, the Act does not require MCOs to contract with FQHCs, nor does it address the terms of any contractual arrangements MCOs might elect to enter into with FQHCs. The Act does, however, include a few provisions that should help to maintain the fiscal viability of FQHCs as state Medicaid programs transition to managed care. (In contrast to the situation with respect to DSH hospitals, these provisions appear to apply in states operating under section 1115 or section 1915(b) waivers.)

Payment Rates

Under current law, state Medicaid programs must cover the services provided by FQHCs and must pay participating FQHCs 100 percent of the cost of delivering covered services to Medicaid patients. The Act phases out this requirement beginning in fiscal year 2000, when states are allowed to pay only 95 percent of costs. The phase-out continues through fiscal year 2003, when states are permitted to pay only 70 percent of costs, and then repeals the requirement altogether effective October 1, 2003. During this same “transitional” period – October 1, 1997 through October 1, 2003 – the Act sets forth two requirements related to reimbursement of FQHCs subcontracting with Medicaid MCOs.

First, MCOs that enter into contracts with FQHCs must make payments on behalf of Medicaid enrollees treated by the FQHCs that are “not less than the level and amount of payments” the MCO would make for the same services if delivered by another provider within the MCO’s network. Second, the Act requires the state Medicaid program to supplement, on a quarterly basis, the payment made by the MCO to the FQHC, so that the total amount the FQHC receives for treating the MCO’s enrollees equals what it would be entitled to get had the patient been a fee-for-service beneficiary. For example, if in fiscal year 1999 the MCO paid its FQHCs 90 percent of cost, the state would have to provide the other 10 percent. These requirements do not guarantee the FQHC any defined volume of Medicaid patients or any aggregate amount of Medicaid revenues. But they do, however, attempt to ensure that, during the transition period, FQHCs do not receive less for treating MCO Medicaid enrollees than for beneficiaries in fee-for-service arrangements.

Timely Payments

The requirements for timely payment by MCOs to DSH hospitals described above also apply to FQHCs. Thus, MCOs must pay 90 percent of the clean claims submitted by FQHCs for covered services provided to MCO Medicaid enrollees within 30 days of receipt, and 99 percent within 90 days of receipt.

Default Enrollment

As with DSH hospitals, the Act provides for default enrollment processes that have the potential to give some priority to FQHCs. The Act requires that states using the section 1932 route to mandatory managed care assign beneficiaries that do not choose among MCOs offered to them in a way that “takes into consideration maintaining existing provider-individual relationships or relationships with providers that have traditionally served [Medicaid] beneficiaries.” FQHCs have patient relationships with many Medicaid beneficiaries and have traditionally served them. MCOs that contract with, or are owned by, FQHCs, could potentially benefit from this statutory standard by enrolling beneficiaries (including patients who they have served in the past) who have failed to select an MCO.

Liberalized Solvency Requirements

As with DSH hospitals, the Act provides for liberalized solvency requirements for FQHCs that want to operate their own MCOs rather than contract with MCOs owned by hospitals or other providers or by investors. (Currently, FQHCs own or operate between 20 and 30 Medicaid MCOs; in six states, these MCOs have the largest Medicaid enrollment.) The Act provides that the solvency standards generally applicable to MCOs – those set by the state for private HMOs or for risk bearing entities – do not apply to an MCO that “is or (is controlled by)” one or more FQHCs and that meets solvency standards “established by the State for such an organization.”


Implementation of the Medicaid managed care provisions of the Balanced Budget Act presents HCFA and the states with a daunting set of implementation issues. HCFA, which is also responsible for implementing the Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191), the Medicare provisions of the Balanced Budget Act, and the new Child Health Block Grant, will have significant new responsibilities with respect to Medicaid. A major task will be to issue administrative guidance on these managed care provisions, as well as monitor and enforce state and MCO compliance with that guidance. HCFA action on these Medicaid managed care provisions, is particularly important: without timely federal guidance and monitoring, in some states federal Medicaid dollars may inadvertently finance the underservicing of low-income women and children and other Medicaid beneficiaries who have been required to enroll in MCOs that do business only with Medicaid.

From the state standpoint, the Balanced Budget Act provides broad new flexibility with respect to mandatory managed care. However, the Act also establishes a number of new federal requirements that may make state Medicaid agencies more accountable for their expenditure of federal Medicaid managed care funds. One is a reinstatement of the requirement for federal prior approval of all state managed care contracts in excess of $1 million. Another concerns new conflict-of-interest rules governing state officials involved in Medicaid managed care contracting. Yet others involve new management information system reporting requirements and a new requirement to develop a quality assessment and improvement strategy consistent with federal standards. The extent to which these requirements actually improve the performance of state agencies and ultimately the performance of contracting MCOs depends largely on how clearly and effectively HCFA (and the HHS Inspector General) implement these requirements.

A critical first-priority issue for both HCFA and the Inspector General is the availability of accurate, policy-relevant data. Currently, most states do not report on a quarterly basis the number of beneficiaries enrolled in MCOs or the cost of those enrollees. Similarly, states generally do not report such information by beneficiary group (e.g., children, adults, disabled, or elderly) or by type of managed care arrangement (e.g., MCO or PCCM). Without this basic information, it is extremely difficult for federal officials or policy analysts to monitor the Medicaid program’s transition to managed care.61 The Secretary of HHS has the statutory authority to require such information; the Medicaid statute has long required state Medicaid agencies to “make such reports, in such form and containing such information, as the Secretary may from time to time require.” This authority was augmented by provisions of the Balanced Budget Act relating to upgrading the state Medicaid management information systems. As the amount of federal Medicaid matching funds flowing through Medicaid MCOs increases, it will become even more essential that the Secretary use this authority to gain a current understanding of the expenditure of those funds and the patterns of enrollment of Medicaid beneficiaries.62

Ultimately, the test of the Balanced Budget Act’s Medicaid managed care changes will come not during the nation’s current economic expansion, but when regional or national economic growth slows significantly, driving down state revenues and increasing the number of people enrolled in MCOs. Will the fiscally pressed states maintain capitation rates high enough to enable even MCOs made up exclusively of Medicaid beneficiaries to provide covered services? If states freeze or even reduce Medicaid capitation rates, how will MCOs react? Will these MCOs leave the program altogether, or will they begin to reduce or withhold covered services from their enrollees? Whatever the response, how will beneficiary access to care, beneficiary health status, and the fiscal capacity of safety net providers be affected? The answers to these questions will not be known for several years. In the interim, careful monitoring of Medicaid’s shift from fee-for-service to managed care will be essential to assess and refine the Balanced Budget Act’s provisions.



58. Jane Horvath and Neva Kaye, Medicaid Managed Care: A Guide for States, 3rd Edition, National Academy for State Health Policy, 1997, pp. I-19 – 1-20. 59. Andy Schneider, Stephen Cha, and Sam Elkin, Overview of Medicaid “DSH” Provisions in the Balanced Budget Act of 1997, P.L. 105-33, Center on Budget and Policy Priorities, September 3, 1997, available on this website 60. An exception is made for “payment arrangements” in effect on July 1, 1997, which appears to apply to Alabama and Wisconsin. 61 As analysts at the Urban Institute recently noted, “Existing national data sources tell us very little about who [Medicaid beneficiaries enrolled in managed care] are, what types of services they use, and how much was spent on these services. As more beneficiaries are enrolled into managed care plans, this problem will be exacerbated.” David Liska et al., Medicaid Expenditures and Beneficiaries: National and State Profiles and Trends, 1990-1995, Kaiser Commission on the Future of Medicaid, November 1997, p. xiii. 62. In connection with the implementation of the Child Health Block Grant, HCFA has issued Medicaid reporting forms calling for the number of unduplicated children and adults enrolled in managed care arrangements, as well as Medicaid payments to MCOs. HCFA, Financing Provisions of the Child Health Insurance Program (CHIP) and Related Medicaid Program Provisions, December 5, 1997 Draft, Forms HCFA-64EC, HCFA-64-EA, and HCFA-37.3.

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Overview of Medicaid Managed Care Provisions in the Balanced Budget Act of 1997

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