HMOs for Medicaid: the road to financial independence is often poorly paved

During the 1980s both the federal government and the private sector articulated policies to encourage the development and participation of health maintenance organizations (HMOs) in the Medicaid program. However, the policies, intended to save costs, limited the ability of new HMOs to achieve financial independence. New plans that emphasize Medicaid participation have few, if any, options on benefit design or in setting capitation rates. Relative to fee-for-service Medicaid programs, their costs to provide services may be quite high, as they have neither the buying power not the ability to impose discounts. As a consequence, plans must focus their financial planning efforts on targeting and attaining a stable enrollment base and on controlling the amount of services provided, tasks that are difficult for all HMOs. Achieving a stable enrollment base is particularly hard because Medicaid eligibles have few incentives to enroll and once enrolled often lose their Medicaid eligibility. Traditional HMOs control the amount of services provided through physician selection, financial incentives on physicians, and monitoring and utilization review. Lack of information and the difficulty inherent in attracting sufficient provider participation limit the first two strategies, so new plans often adopt organization structures that rely heavily on monitoring activities. Unfortunately, management information systems for HMOs are often the weakest link. We discuss the tasks and present data on financial planning, on putting financial plans into operation, and on monitoring progress toward financial independence for a set of ten demonstration projects sponsored by the Robert Wood Johnson Foundation.