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Demonstrations to Improve the Coordination of Medicare and Medicaid for Dually Eligible Beneficiaries: What Prior Experience Did Health Plans and States Have with Capitated Arrangements?

Individuals dually eligible for Medicare and Medicaid are a diverse population, with characteristics and care needs that create vulnerabilities and account for a disproportionate share of health care spending.1 About 40 percent are low-income, under age 65, and disabled, including a majority with significant mental health or substance abuse service needs, and many with extensive long-term services and supports (LTSS) needs. The others are low-income elderly individuals, many of whom have multiple chronic conditions or are frail, and may require LTSS.2 Many of these individuals have a diversity of needs and require complex care management that leverages a wide variety of services and provider types.

Medicare is the primary payer for acute care services required by dually eligible beneficiaries, whereas Medicaid provides additional benefits not covered by Medicare (primarily LTSS) and covers cost sharing and premiums associated with the Medicare program.3,4 Although effective care typically requires coordinating the benefits covered by these different programs, the means for doing so have been limited historically, with each program operating independently.5 Beneficiaries generally have received services paid on a fee-for-service basis, with no single entity responsible for seeing that services are coordinated appropriately to meet the needs of individual beneficiaries.

Existing Managed Care Options for Dually Eligible Beneficiaries

Medicare Advantage is the main managed care option within Medicare. Although all beneficiaries may enroll, there have been limited incentives for dually eligible beneficiaries to do so because they have typically received the extra benefits offered by Medicare Advantage plans (such as lower cost-sharing and limited benefits for vision and dental services) through Medicaid. To better serve their needs, the Medicare Modernization Act of 2003 allowed for the development of Dual Eligible Special Needs Plans (D-SNPs) that could be tailored to those dually eligible for Medicare and Medicaid. D-SNPs have recently been required to have contracts with state Medicaid agencies (in addition to Medicare) and coordinate delivery of Medicare and Medicaid benefits. However, states have little financial incentive to integrate benefits unless Medicaid LTSS are included in the benefit package because Medicaid coverage of acute care benefits is very limited for dually eligible beneficiaries).

Integration is less challenging for states with prior experience in aligning Medicare and comprehensive Medicaid benefits.  While most D-SNPs provide only Medicare benefits in their capitated benefit packages, Fully Integrated Dual Eligible (FIDE) SNPs are D-SNPs that coordinate Medicare and Medicaid services and contract with states to provide Medicaid services, including LTSS, on a risk basis. Demonstration states that have implemented FIDE SNPs (California, Massachusetts, Minnesota, and New York) have had more experience with integration for dually eligible beneficiaries than others, as discussed later in this brief.

Within Medicaid, comprehensive risk-based managed care is the broadest-based managed care program.6  Historically, these programs were developed to serve low-income families and children. However, programs have been expanded in some states to cover those eligible for Medicaid based on disability, and health plans have had to adjust their provider networks and care management tools to address this population’s needs. Typically, these programs have been restricted to Medicaid-only individuals because of the challenges in coordinating benefits across Medicare and Medicaid. When state Medicaid programs focused on managed care for dually eligible beneficiaries, they generally did so primarily to coordinate and limit cost growth in LTSS, which are state responsibilities.7

The health plans participating in Medicare and Medicaid are not necessarily the same plans, and therefore health plans serving dually eligible beneficiaries may not already have experience serving members under each program.8 Medicare Advantage plans are more likely to have had experience in managing acute care benefits for both aged and disabled beneficiaries, whereas Medicaid health plans generally have managed benefits for low-income families and children and, in some states, acute care services and/or LTSS for adults with disabilities. Enrollment in health plans is voluntary in Medicare but can be mandated in Medicaid if states meet federal terms and conditions.

An Overview of the Financial Alignment Initiative

With the goal of better coordinating care financed by the Medicare and Medicaid programs for dually eligible beneficiaries, the Affordable Care Act authorized the creation of a new Medicare-Medicaid Coordination Office within the Centers for Medicare and Medicaid Services (CMS). Its goal is to enhance dually eligible beneficiaries’ access to benefits, simplify and make more consistent the requirements and processes used across the two programs, better coordinate the programs’ benefits, and enhance the quality and cost-effectiveness of care.9

The Financial Alignment Initiative is one major strategy being pursued to achieve these goals. Under the initiative, states were solicited to participate in a partnership with the federal government to develop demonstrations to better align care for dually eligible beneficiaries across Medicare and Medicaid.10  States were provided with two basic models: a Capitated Managed Care Model and a Managed Fee-for-Service Model.11  The initial design of the financial alignment demonstrations was very ambitious, with the expectation that, by 2012 and 2013, a large number of states would be actively engaged in operational programs that served large numbers of individuals; this expectation generated some concern about the wide scope and rapid pace of change sought and the potential disruptions to services for vulnerable beneficiaries.12  Although 26 states initially expressed interest in some form of the demonstration involving either model, at least 11 later withdrew and the time frame for other states was delayed.13

This brief focuses specifically on the capitated managed care model being pursued under the demonstration. The model involves contracting with health plans on a capitated basis to provide coordinated benefits across Medicare and Medicaid. Some experts believe that a managed care approach offers the greatest potential to modify fee-for-service incentives (which can incentivize provision of unnecessary services) and achieve better coordination of services and across benefits covered in different programs. Capitated payment, by its nature, focuses on the totality of care for people enrolled in the health plan. Conceptually, capitation provides incentives to manage  care in ways that prevent, where feasible, avoidable conditions or complications that can be expensive to treat and harmful to the health of the enrollee.  Because they are responsible for all the covered benefits received by this population, managed care plans  must develop provider networks and other policies that support adequate access to covered by their contracts with Medicare and Medicaid. Contracts with these payers in turn include requirements that plans must meet and stipulate processes of oversight. They typically also require reporting of performance metrics that reflect care for the populations they serve.  Such requirements are harder to implement in fee-for-service and are especially important in caring for the dual eligible population.

There are, however, also inherent risks that capitation’s financial incentives will lead to underservice and suboptimal care, particularly if contracts are signed with plans and associated providers that have limited experience in providing services for the dually eligible population. Their provider networks may not necessarily include the full range of specialized services that dually eligible beneficiaries are likely to require (such as specific types of substance abuse, mental health, and LTSS providers); also, care management tools developed for a healthier population may not be adequate for dually eligible beneficiaries. There are concerns regarding potential trade-offs between cost containment and quality of care, and the potential that dually eligible beneficiaries in the demonstration could be treated differently from other Medicare beneficiaries, particularly with regard to beneficiary choice, protections, and oversight.

States are using so-called “passive” enrollment for the demonstrations, notifying beneficiaries about their pending enrollment in a demonstration health plan but allowing them to opt out at any time (effective monthly) before or after enrollment. Beneficiaries may be passively enrolled in a plan that does not include all of their providers in its network. Therefore, in order to avoid service disruptions for beneficiaries in the demonstrations, it is particularly important that health plans’ provider networks match the needs and service patterns of the population. (Appendix A summarizes differences across the programs in more detail.)

The balance between risks and rewards to consumers and other stakeholders depends on the adequacy of the requirements in the managed care contracts that define the health plan’s responsibilities, the experience and quality of the health plans implementing them, and the effectiveness of shared oversight by the federal government and states. This brief does not examine the capacity of states and the federal government to oversee the demonstrations. However, capacity for demonstration oversight depends on a number of factors, including past experience with similar programs. State background is particularly important because the design of the financial alignment demonstration was structured to encourage states to design and tailor the demonstration to the needs of the state, and states have considerable responsibility (jointly with CMS) for both implementation and overseeing the way they work.14

How Managed Care Contracts were Developed For The Demonstrations

The managed care models being implemented by states evolved through a multi-step process of negotiation, first between states and the federal government, and later between the federal government, states, and health plans. During the first half of 2012, states submitted proposals to CMS, and many also tentatively selected health plans at around the same time. CMS then negotiated individual memoranda of understanding (MOUs) with states, the first of which was signed with Massachusetts in August 2012. Based on the MOU, the federal government and the state then developed a three-way contract between CMS, the state Medicaid agency, and participating health plans, laying out  details of terms, requirements, and payment rates. The nature of this process influenced the final composition of participating health plans.

The development of these contracts and implementation of the demonstrations required harmonizing Medicare and Medicaid timelines and requirements in areas such as plan selection, provider network adequacy, quality oversight, and appeals processes. Reconciling these requirements contributed to delays and some attrition of participating states and health plans when agreement could not be reached on key terms. Additionally, the initiative generated national controversy about its scale and speed, and consumer advocacy groups and others expressed concern over various aspects of it, both nationally and in individual states.15 The delays allowed for time to address various complexities in demonstration development, but also caused uncertainty among providers, beneficiaries, and stakeholders about what would roll out and when.

In health plan interviews in 2012, plan executives expressed concerns over how well disparate requirements across the programs would be reconciled, and some noted that, although states were negotiating with the federal government, the plans had relatively little information available on key parameters, such as rates.16  Because many critical details important to health plans (such as payment rates and requirements) were not known at the start, some health plans that initially were selected later withdrew in the course of negotiations on the three-way contract.

Although all participating health plans were required to meet both Medicare and Medicaid requirements, the demonstration allows state Medicaid programs to “passively enroll” dually eligible beneficiaries into health plans that cover their Medicare benefits as long as beneficiaries can opt out at any time. Plans under a Medicare enrollment or marketing sanction are not eligible for any demonstration enrollment, and CMS rules prohibit companies with low past performance in Medicare Advantage from receiving passive enrollment in their demonstration health plans.17

Executive Summary The State Context of the Demonstrations

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Filling the need for trusted information on national health issues, the Kaiser Family Foundation is a nonprofit organization based in Menlo Park, California.