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MYTH #1: REALITY As originally designed and successfully operated, TennCare relied on managed care to control utilization and costs. The state contracted with private managed care organizations (MCOs), also known as health maintenance organizations (HMOs), to monitor individual patient care and drive the system toward greater efficiency. The MCOs had strong financial incentives to contain costs, because, under their contracts with the state, the MCOs’ profits depended on their success in holding down TennCare expenses. So, Tennessee limited Medicaid services, but did so based on individualized review of patients’ medical needs, rather than through an arbitrary numerical limit that applied equally to everyone, regardless of how sick they are. Hospital use was cut in half after TennCare was implemented, and Tennessee achieved the second lowest cost per Medicaid enrollee in the nation.1 But during Governor Don Sundquist’s second term, from 1999 through 2002, TennCare became a casualty of his efforts to win enactment of a state income tax. Both sides in the tax fight used TennCare as a political football. The program’s management was neglected, and its design was fatally weakened. In 2002, Governor Sundquist relieved the MCOs of financial risk, removing their incentives to manage TennCare’s costs. Since then, costs have risen rapidly, not because the program was too generous, but because the contractors were no longer managing care. When Governor Bredesen took office in January 2003, he promised to fix the situation but failed to do so.2 1 Kaiser StateHealthFacts, “Medicaid Payments per Enrollee, by Group, FFY 2002”, available http://www.kff.org/medicaid/upload/kcmu032106atable2.pdf; G. Bonnyman, ”Stealth Reform: Market-Based Medicaid In Tennessee, Health Affairs, Summer 1996; 15(2): 306-314. 2 See Myth # 4 . The TennCare Bureau claims to have returned the MCOs to financial risk in July 2005. That would mean that the MCOs would be expected to pay for enrollees’ medical care from the premiums, or “capitation payments”, they received from the state, and would be “at risk” financially for the cost of any care that exceeded the amount of those payments. In fact, the state remains at financial risk for the cost of medical care, and the MCOs continue to receive an administrative fee for processing the payments made from state funds. The July 2005 contract amendments made 25% of the administrative fee subject to adjustment as a performance incentive, but the allocation of risk for the cost of care remains unaffected.
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