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Section III. Medicaid Managed Care Study

Overview of the Texas Medicaid Managed Care Program


In response to rising costs and national interest in cost-effective health care, the 1991 Legislature passed H.B. 7, which directed the state to establish Medicaid managed care pilot programs. These pilots (implemented in Travis County and in the Tri-County Area of Chambers, Jefferson and Galveston counties) initially were known as the LoneSTAR (State of Texas Access Reform) Health Initiative. The name was later shortened to STAR.

From 1995 through 1997, several bills passed that both expanded the Medicaid managed care coverage areas and strengthened Medicaid managed care client and provider protections. The expansions included the service delivery areas of Lubbock, San Antonio, Houston, Dallas/Fort Worth and El Paso. A Medicaid managed care service delivery area is the county of a city and all the counties next to this county. Two unique pilots accompanied these expansions: the STAR-PLUS program in Harris County, which integrated acute and long-term care services for Medicaid clients receiving Supplemental Security Income (SSI), and the NorthSTAR program in the Dallas area that provides behavioral health and substance abuse services to Medicaid clients and certain other clients with incomes below 200 percent of the Federal poverty limit. [1]

The 1999 Legislature, through S.B. 2896, placed a moratorium on further managed care expansion but allowed the state to complete the Dallas and El Paso expansion projects already under way. The new law directed HHSC to evaluate the effects of the Medicaid managed care on access to care, quality, cost, administrative complexity, utilization, care coordination, competition and network retention. In 2001, following the release of the Medicaid Managed Care Report, the moratorium was lifted. [2]

H.B. 2292, approved in 2003, directs HHSC to provide Medicaid services through the most cost-effective model of managed care. The expansion plan includes two models: health maintenance organization (HMO) model and a primary care case management (PCCM) model (both defined below). The HMO model will be used in one new service area consisting of Nueces County (Corpus Christi) and surrounding counties. The PCCM model will be implemented in all remaining counties without an HMO model.

PCCM will be phased out of existing HMO service areas that have an adequate provider network in place to support additional members. The STAR-PLUS HMO model program for the disabled clients will be expanded to operate in all service areas in which the acute care services HMO model is available. The PCCM expansion is scheduled to be complete by September 2005. The service area maps and expansion timeline are available on the HHSC Web site at[3]

Medicaid Managed Care Program

Managed care refers to a health system in which a network of health care providers agree to coordinate and provide health care to a population in exchange for a specific payment per person, the "capitation rate." Managed care is distinguished from traditional fee-for-service (FFS) health financing arrangements by four major features:

  • Primary Care Providers (PCPs) ―Managed care relies on a primary care physician to provide primary medical services comprehensive preventive service, so that members can have access to a medical professional, in person or via telephone, on a 24-hour/seven-day week basis.
  • Defined Network of Providers―a group of providers under contract with a managed care organization. Client choices usually are limited to this network with the exception of referrals to specialists outside the network.
  • Utilization Review (UR) and Utilization Management―a comprehensive program to monitor HMO providers. The UR portion may be prospective, such as preadmission screenings or procedure preauthorization; concurrent, such as case management during a hospital admission; or retrospective, such as examining treatment plans over time.
  • Capitation―is the unique financing arrangement that distinguishes managed care from traditional FFS. Under capitation, health care payers such as Medicaid or employers purchase care at a fixed, per-person rate. The HMO assumes the risk of providing services that are medically necessary and pre-approved (contracted) services for their enrollees. [4]

Texas Medicaid currently delivers services through two different managed care models:

  • HMOs licensed by the Texas Department of Insurance to deliver and manage health services under a risk-based arrangement. Each HMO receives a monthly capitation payment for each person enrolled, based on an average projection of medical expenses for the typical patient.
  • Primary care case management is a non-capitated model in which each participant is assigned to a single PCP who must authorize most other services, such as specialty physician care, before Medicaid can reimburse them. HHSC sets up physician networks and contracts directly with providers. PCCM providers receive FFS reimbursement for healthcare services and a small monthly case management fee ($2.92) for each client enrolled. [5]

In fiscal 2003, 39.7 percent of the Texas Medicaid clients were enrolled in the managed care program. [6]

Medicaid Managed Care Enrollment

When first implemented, Texas' Medicaid managed care program primarily served non-disabled, low-income families, children and pregnant Medicaid clients. During the 1996 expansion of the managed care program, certain blind and disabled Medicaid clients receiving SSI and SSI-related benefits were allowed to participate as well.

The STAR program currently enrolls all Medicaid clients who are eligible for Temporary Assistance for Needy Families (TANF) and low-income children; SSI/SSI-related clients can be enrolled as well, on a voluntary basis. [7]


Texas chose to test Medicaid managed care models with the goal of combating the continuous rise in healthcare costs. HHSC wanted to provide Medicaid clients with quality healthcare through a primary care provider. Before managed care, many clients used emergency rooms or clinics for minor health problems such as colds or chronic health conditions such as asthma. Providing Medicaid clients with a PCP not only reduced the use of expensive emergency facilities, but also offered clients continuity of care with a single provider who can also manage chronic conditions to prevent acute problems.

Managed care programs generate savings by, as an HHSC report puts it, "changing how providers are paid, developing select provider networks and establishing protocols for appropriate care." [8]

The HHSC has generated savings in all three managed care programs:

  • an independent assessment by William M. Mercer, Inc. reported a savings of $146.7 million for the STAR program in fiscal 2002;
  • recent projections for the STAR+PLUS program estimated savings of $29.4 million for fiscal 2004; and
  • over a four-year period, NorthSTAR saved about $20 million. [9]

Financing and Expenditures

HHSC reimburses contracted HMOs by premium (capitated) payments based on risk groups to which Medicaid clients are assigned. The eight risk group categories in the STAR program offer varying monthly payment amounts ranging from $53.78 for a child with the El Paso First Premier HMO to $442.58 for a TANF child under a year old enrolled with one of the Harris County HMOs. HMOs also receive $14 monthly administrative fee payments for each client in the Blind and Disabled program.

HHSC also makes supplemental payments to HMOs for each delivery by an enrolled Medicaid client. These payments range from $2,801.70 to $3,060.18, based on the service area. [10]

The average monthly enrollment of Medicaid managed care clients during calendar 2004 was 111,422. [11] HMOs received $1 billion in total capitated payments during that year. [12]

Fraud and Abuse Activities

As in the Medicaid FFS program, the HHSC's Office of the Inspector General is responsible for detecting and investigating potential fraud or abuse committed by providers offering services to Medicaid clients enrolled in the state's PCCM program.

Each HMO is required to produce a written fraud and abuse compliance plan, based on a model plan issued by the Office of Inspector General, no later than 30 days after the effective date of its contract. The HMO must designate an officer or director to carry out the provisions of its compliance plan. The plans must:

  • contain procedures designed to prevent and detect potential or suspected abuse and fraud in the administration and delivery of services;
  • contain provisions for the investigation and follow-up of any compliance plan reports; and
  • require that the HMO report any confirmed or suspected fraud and abuse under state or federal law to HHSC, the Medicaid Program Integrity section of the Office of the Inspector General and/or the Medicaid Fraud Control Unit of the Texas Attorney General's Office.

HMOs that fail to report potential suspected fraud or abuse may be sanctioned, have their contract canceled or be excluded from participating in the Medicaid program. [13]

Medicaid Managed Care Capitation Payment Study


This study is intended to measure the incidence of potential overpayments, which may include instances of fraud and abuse, in the Texas Medicaid program. Section 403.028 of the Texas Government Code requires the Comptroller's office to perform this study biennially in consultation with the State Auditor's Office.

This study was performed as part of the combined Texas Health Care Claims study and the Centers for Medicare and Medicaid Services (CMS) year-two Payment Accuracy Measurement (PAM) study discussed in Section I. The Texas project team worked with CMS to develop a method of measuring potential fraud or abuse within a Medicaid managed care program. This methodology focused on the validation of client eligibility and enrollment and the capitated payments to the HMOs.

This study also examined:

  • supplemental payments made to HMOs by HHSC for Medicaid clients who delivered a baby; and
  • fee-for-service claims paid by the Texas Medicaid Healthcare Partnership, the claims administrator, for enrolled HMO clients.

This Medicaid managed care capitated payment study and client eligibility reviews occurred before HHSC's reorganization in September 2004. This section describes the sample selection, review method and study findings. Note that HHSC refers to capitated payments as premium payments and these terms are used interchangeably.

Managed Care Capitation Payment Sample Selection

The managed care capitated payment study sample was selected randomly by client Medicaid number from all HMO capitated payments made from October through
December 31, 2002. HHSC's Center for Strategic Support selected the sample for the project team. Before selecting this sample, the data were reviewed for duplication and any other potential problems. A total of 1,067 sample clients were selected. The State Auditor's Office validated the sample for representation of the total population.

Following the sample selection, HHSC used the sample clients' program numbers to identify all delivery and new infant supplemental payments in the sample and all FFS claims paid for services to HMO-enrolled Medicaid clients during the sample timeframe.

Managed Care Capitation Payment Study Review

The review was performed by a contracted certified public accountant with experience in health care insurance and Medicaid managed care, following PAM review guidelines. This contractor provided a registered nurse with managed care insurance experience to review FFS claims paid for the sample clients.

Eligibility Review

According to the PAM guidelines, each sample client's eligibility enrollment must be examined for compliance with federal and state requirements. This research was performed using the Texas Department of Human Services' (DHS) online eligibility system and its caseworkers' electronic enrollment worksheets. A standardized worksheet (appendix C.2.) specific to this eligibility study was used, similar to the FFS and Vendor Drug Program reviews. Items verified included budget/household group members, household income, clients' Social Security numbers, program type assignments and eligibility recertification. All eligibility errors were reviewed with DHS Texas Works Program Policy staff.

Premium (Capitated) Payment Review

Following the eligibility review, the premium amounts were validated to the HMO contracted amounts for the sample timeframe. Texas uses a generic contract to specify system requirements, required program health care services covered by the premium payments, the carved-out (non-capitated) benefits and the enrollment process. Carved-out services refers to special services such as dental care, vision care or psychiatric care that are not included in the benefits covered by the premium payment.

Premium payments are based on recipient risk groups and each HMO in a service delivery area has a contract amendment listing payment amounts for each risk group. Copies of these HMO amendments were used to verify the sample premium payments.

In addition to the premium reviews, a delivery supplemental payment (DSP) review was performed on all pregnant and newborn sample clients. The reviewer matched the HMO reported deliveries and payments to the actual pregnant client's delivery date (per medical claim) or the newborn client's date of birth.

Fee-For-Service Claim Review

HHSC's Medicaid Fraud and Abuse System data warehouse provided a list of all paid FFS claims paid for the managed care sample clients from October through December 31, 2002. The nurse reviewer researched claims online for type of service and provider to determine if they were paid appropriately, such as FFS carved-out dental services. Thirty-seven claims for 19 sample clients were identified as potentially being paid for services covered by the HMO contract. At the time of the study, the project team did not have sufficient time to request and review these medical records. None of these services were counted towards the error rate.

Managed Care Capitation Payment Study Findings

There were three types of study errors identified in this study: capitation, eligibility and processing. Of the 1,067 sample clients reviewed for the managed care study, 68 were found to have errors. These errors are listed in Table III-1 below.

Table III-1: Medicaid Managed Care Errors

of Errors
of Errors
Capitation (premium) 21 9 12 21
Eligibility 2 2 0 2
Processing 45 0 0 0
Totals 68 11 12 23

The study project leader provided all the sample clients identified with potential errors to the Program Policy department of the Texas Workforce Division prior to finalizing the results of the managed care review. The potential errors were reviewed in detail by the Program Policy staff using the application information and input from the caseworkers when necessary. The errors are summarized below.

Capitated Payment Errors

The only discrepancy identified with premium payment reviews that was not related to eligibility enrollment concerned the delivery supplemental payment. Each HMO is responsible for reporting clients' newborn deliveries in the month following the delivery. The HMOs have up to seven months to report their newborn deliveries for reimbursement. Out of 45 deliveries from October through December 2002, the sample HMOs failed to report six deliveries by August 2003. Of the remaining 39 deliveries, the sample HMOs reported 38 in the month following the newborn delivery. These discrepancies were not counted as overpayments because they are an additional payment not related to the (capitated) premium payment.

A total of 21 capitated payment errors were identified. These errors were identified during the eligibility review and resulted in either overpayments or underpayments. The errors were mainly due to clients enrolled in the wrong HMO service delivery area based on the client's address (nine clients for a total of $575.82) and caseworker's delayed changes of children's age-specific eligibility program types (nine clients for a total of $1,595.65). There are three age-specific client program types for birth to one year, age one to five and age six to 19, with different premiums amounts paid for each group.

Eligibility Errors

There were two client's identified who were ineligible for the Medicaid program during the sample month for a total of $613.88. One client failed to notify the caseworker of a miscarried pregnancy and the other client did not reside in any managed care service delivery area.

Processing Errors

A total of 45 processing errors were identified. The most significant processing errors identified during the sample clients' eligibility research occurred when caseworkers recertified clients eligibility late and when clients had pregnancy eligibility program assignments although they were not pregnant. Other processing errors found were incorrect addresses (same service area), social security numbers not validated appropriately, missing social security numbers and misspelled client names.

Reductions in caseworker staffing through attrition and high turnover may be causing the errors related to recertification and age-appropriate program type changes. Unfortunately, delayed recertifications cause clients to either lose their Medicaid coverage or experience a gap in their coverage. These clients, when their eligibility is reestablished, must re-enroll in the managed care program and reselect a primary care physician.

Some findings, such as inappropriate pregnancy enrollments, point to problems with the current self-declaration policy used in Texas state program enrollments. One of the sample clients had three consecutive pregnancy enrollments (program type 40) with no newborn deliveries. Another sample recipient was enrolled in program type 40 for 20 months with no newborn delivery. In both cases, the recipient failed to notify her caseworker that the self-declared pregnancy terminated early without a newborn delivery.

The processing errors are not counted as overpayments since it is difficult to determine if these errors are due to clients not notifying their caseworkers or to the caseworkers not documenting the information when notified.

Potential Payment Error Measurement

The payment error rate calculation used is similar to the Vendor Drug Program (VDP) and State Office of Risk Management studies. Since the sample was selected randomly, without separate categories it did not require an averaging procedure. When the sample was selected, the State Auditor's Office performed statistical analysis tests to confirm that the samples represented the universe of paid premiums. The calculation divided the total dollars paid for premiums identified with potential overpayments and underpayments by the total dollars paid for the sample premiums.

The calculation of the point estimate of the payment error rate involved dividing the total dollars paid for premiums identified with potential overpayments or underpayments by the total dollars paid for the sample premiums. Example:

Medicaid Managed Care Capitated Payment Study Payment Error Calculation
Amount of potential payment errors:
Total amount paid for the sample premiums:
= 2.18% Payment Error Rate

Dollars at Risk

The payment error measurement can be applied to the annual Medicaid premium expenditures to determine the "dollars at risk" in Medicaid HMO managed care. The term "dollars at risk" is used because the amount computed when applying the payment error measurement to annual expenditures is not recoverable unless all of the HMO enrolled clients and associated premium payments that are questionable are identified through a complete review of all HMO premium payments, which is not possible given the size of the program. Instead, HHSC can use the findings in this study to target specific areas of investigation, as it does for the FFS and VDP studies.

The "dollars at risk" figure for 2002 was $18.9 million This figure was computed by multiplying the payment error measurement rate of 2.18 percent times $867 million in Medicaid HMO premium expenditures for calendar 2002.

Medicaid Managed Care Study Recommendations

HHSC's Office of Eligibility Services and the Comptroller's Texas Health Care Claims Study project team are conducting eligibility reviews on both traditional Medicaid and managed care clients to meet S.B. 2292's requirements and the Centers for Medicare and Medicaid Services measurement study requirements.

Texas Health and Human Services Commission

  1. The Office of Eligibility Services should develop a staff of eligibility reviewers to perform regular reviews of client applications and enrollments in the traditional Medicaid FFS and Medicaid managed care programs.
  2. The Office of Eligibility Services should use the findings of these reviews to improve its Medicaid eligibility certification process, through caseworker education and evaluation of the online eligibility verification system.

Texas Comptroller of Public Accounts

  1. The Comptroller's office should evaluate the feasibility of performing parallel state and federal measurement studies on the Medicaid managed care program to conserve state funds.

Fiscal Impact

HHSC should evaluate its resources to determine if these recommendations can be implemented without further appropriations.


[1] Texas Health and Human Services Commission, Texas Medicaid in Perspective, Fifth Edition (Austin, Texas, June 2004), p. 6-3, available in pdf format at (Last visited January 18, 2005.)

[2] Texas Health and Human Services Commission, Texas Medicaid in Perspective, pp. 6-3 - 6-4.

[3] Texas Health and Human Services Commission, "Medicaid Managed Care Expansion and Procurement of Medicaid/CHIP HMO Services," (Last visited January 13, 2005)

[4] Texas Health and Human Services Commission, Texas Medicaid in Perspective, p. 6-1.

[5] Texas Health and Human Services Commission, Texas Medicaid in Perspective, p. 6-2.

[6] Texas Health and Human Services Commission, Texas Medicaid in Perspective, p. 6-9.

[7] Texas Health and Human Services Commission, Texas Medicaid in Perspective, p. 6-8.

[8] Texas Health and Human Services Commission, Texas Medicaid in Perspective, p. 6-14.

[9] Texas Health and Human Services Commission, Texas Medicaid in Perspective, pp. 6-14 and 6-15.

[10] E-mail communication from Dwight Casey, accountant, Fiscal Management department, Texas Health and Human Services Commission, Austin, Texas, July 20, 2004.

[11] Texas Health and Human Services Commission, "Texas Medicaid Managed Care Monthly Confirmed Eligibles Reports," (Last visited January 19, 2005.)

[12] E-mail communication from Dwight Casey, accountant, Fiscal Management department, Texas Health and Human Services Commission, Austin, Texas, July 22, 2004.

[13] Texas Health and Human Services Commission, "Contract for Services between Texas Health and Human Services Commission and HMO, September 1999, with amendments incorporated through September 1, 2002," (Last visited January 19, 2005.)