Develop Selective Contracting for Medicaid Inpatient Services

The state should develop a system of selective contracting for Medicaid inpatient services that would reduce costs through increased competition.

Texas could follow the example of purchasers of health care services in the private sector b y selectively contracting with hospitals. Such a selective process would also avoid a large spending increase as hospitals litigate for higher reimbursement rates under a provision in federal law commonly called the Boren Amendment. Selective contracting is for non-emergency care only.

Purchasers of health care services in the private sector, such as large businesses, health maintenance organizations (HMOs) or preferred provider organizations (PPOs), negotiate contracts with selected hospitals to provid e services at a reduced rate. The payor for the health care services guarantees that the hospital will receive a large number of patients on a regular basis, which reduces the hospital s cost of maintaining empty beds.

Because of rapid increases in inpatient hospital costs and a budget shortfall in their Medicaid program, California passed legislation in 1982 allowing its Medicaid program (Medi-Cal) to negotiate contracts with providers. California now contracts with sel ected hospitals for Medicaid non-emergency acute care inpatient services. This is similar to the way businesses contract with health maintenance organizations for selected hospitals to provide services to their employees.

The California Selective Provider Contracting Program contains the overall expenditures for hospital services reimbursed by the Medi-Cal Program and assures adequate access to quality services for beneficiaries through a competitive, rather than a regulato ry process. The state selects specific hospitals to provide inpatien t care to Medi-Cal beneficiaries and gives them the opportunity to compete for contracts. The state awards contracts to provide needed capacity for Medi-Cal patients, selecting those hospitals which offer the most cost-effective service arrangements. As a result, in contract areas, Medi-Cal beneficiaries receive elective inpatient care in contract hospitals only.

California obtained a waiver from the federal Health Care Finance Administration (HCFA), which administers Medicaid nationally, so the state cou ld require Medi-Cal patients to obtain services from only selected providers. The Medi-Cal contract pays these hospitals a flat per diem rate with less paperwork and fewer audits. About 260 of the 590 hospitals in the state currently have contracts and ser ve 85 to 95 percent of all Medi-Cal patients. California now saves an estimated $300 million per year from these contracts.

Illinois had a similar program for several years and saved an estimated $100 million annually, but it was discontinued following a change in administrations and a switch to a different system of reimbursement. The average Medicaid cost per day in Illinois has since risen substantially.

Both California and Illinois officials have been pleased with the high quality of care under this type of system. In addition to relying on strict regulations already in place for hospitals, both states independently audit hospitals for quality of care. Il linois contracted for a two-year period, which meant that hospitals had to compete often to win contracts while maintaining quality standards.

To implement selective contracting, Texas would need to receive a waiver from HCFA, then work with Texas hospital groups to structure participation incentives and identify appropriate geographic areas.

Contracts would need to ensure that selected providers could meet the needs of Medicaid beneficiaries. The Texas Medicaid program would need to monitor the contracts closely.

Some states, including Texas, are being sued by hospitals to raise their Medicaid reim bursement rates to cover what they argue is the cost of care, under the federal Boren Amendment. Selective contracting can end these suits. Where selective contracting is practiced, the state no longer establishes rates of reimbursement; hospitals contract for the amount of services and reimbursement. Selective contracting could offer a way for Texas to avoid or mitigate large increases in spending due to lawsuits under the Boren Amendment.

According to the Massachusetts Hospital Association, about 20 states have faced Boren Amendment challenges, most of which have been settled out of court in favor of the provider. 1 In a settlement in the State of Washington, Medicaid payment rates for patient-care services increased an average of 10 percent. 2

The Legislature should mandate that the Health and Human Services Commission (HHSC) develop a system of selective contracting for Medicaid inpatient services.

HHSC should seek input from hospitals in the development of the system. The system would require application for a waiver from the federal government. Because approval lies outside the state s control, appropriations from these savings must be made contingent upon receipt of the waiver.

A selective contracting process would introduce competition into the inpatient health care field and give the state greater control over hospital cost increases. It would enable Texas to save general revenue and federal dollars. Selective contracting is fo r non-emergency care only.

Fiscal Impact
It took California six months after legislation passed to begin their selective contracting process; the state had begun working on the process before legislation passed.

The fiscal 1994 amount assumes no revenue for the first nine months to allow for start-up. It also assumes that start-up costs may result in higher administrative costs during the first year.

The net savings to general revenue are estimated to be over $12 million in 1994 and close to $50 million in 1995, the first full year of operation. Total estimated savings to general revenue from 1994 to 1998 are more than $200 million.

The California program currently costs about $2 million per year to administer. Half of that amount is reimbursed with federal funds as administrative expenses under Medicaid.

California has about 20 people on their Medical Assistance Commission staff, including researchers, negotiators and support staff, who negotiate with over 260 hospitals on an ongoing basis.

To achieve the savings in the fiscal impact tab le, general revenue appropriations for Medicaid should be reduced accordingly. A rider should be included in the General Appropriations Act to reduce appropriations by these amounts upon receipt of the waiver.
Gross Savings Net Savings Reduced
Fiscal to the General Administrative to the General Cost to Change in
Year Revenue Fund 001 Costs Revenue Fund 001 Federal Funds FTEs

1994 $12,627,000 $1,250,000 $11,377,000 $21,632,000 +20
1995 50,507,000 1,000,000 49,507,000 90,527,000 +20
1996 50,507,000 1,000,000 49,507,000 90,527,000 +20
1997 50,507,000 1,000,000 49,507,000 90,527,000 +20
1998 50,507,000 1,000,000 49,507,000 90,527,000 +20

1 MHA Has Bad Reaction to new Medicaid contract, Boston Business Journal, vol. 12, no. 32, section 1, p. 12.
2 David Burda, Washington Settlement to Boost Payments 10%, The Week in Health Care, p. 24.