Managed care versus fee-for-serivce … then and now


On October 1, 2012, the Minnesota Department of Human Services (DHS) issued an RFP seeking a vendor to evaluate whether the state of Minnesota is receiving a benefit from delivering public health care programs through its current “managed care” system.

Managed care relies on non-profit HMOs to administer public health care programs, rather than having the state reimburse providers through a so-called “fee-for-service” model. Under the managed care model, HMOs receive blocks of public funds, and then pay providers for services rendered to public program enrollees. In contrast, the fee-for-service model involves direct provider reimbursements from the state. In both cases, the funds that underwrite the public programs entail a combination of state and federal monies.

Minnesota began moving heavily toward the managed care model in the early 1990s, with the expectation that HMOs would save money on public programs through greater efficiencies, courtesy of their established provider networks and management expertise. Around that time, DHS sought to study public program outcomes to see if these benefits were being realized.

1993 DHS study

In 1993, the Minnesota Department of Human Services undertook a review of the managed care model, and compared it to the fee-for-service model in order to gauge the overall effectiveness of managed care. A draft of the 1993 report, written by Steven Foldes, is available in our document archives.

According to a 1994 article in the Star Tribune newspaper, the Foldes report met with opposition from participating health plans once DHS began to circulate drafts of the study. The story also claimed that DHS subsequently shelved the report.

A 1994 cover letter from Gary M. Miles of DHS to Adam Marsnik of the Minnesota Legislative Reference Library stated that “the participating HMOs have questioned the accuracy” of the attached Foldes study, and further noted that DHS staff acknowledged shortcomings in the data and methodology used in the report.

In his report, Steven Foldes also stated that the study had flaws in its data collection, but noted that the flaws were due to the fact that health plans did not share sufficiently detailed data with DHS.

Findings of the 1993 study

The Foldes study held that “considerable differences” existed in the patterns of health service use between the managed care and fee-for-service models, and also noted that further study should be undertaken in order to better understand those differences. The report’s executive summary made the following points:

• Ongoing monitoring of managed care programs was needed. According to the report, “Program managers cannot assume … that differences point to ‘better’ care in the health plans.”

• In order to ensure accurate program analysis, DHS needed to obtain access to detailed HMO claims data on costs and utilization, rather than the summary data provided by the health plans.

• Under managed care, younger enrollees were using the emergency room less, but were also using more in-patient and out-patient services than their fee-for-service counterparts.

• Managed-care enrollees over 65 years of age were using more expensive, in-patient hospital services more often than their fee-for-service counterparts.

In a cover sheet to the fourth draft of his report, Steven Foldes characterized the high use of in-patient hospital care by elderly enrollees as “disturbing” and “controversial,” and noted that “work continues … to rule out the possible presence of a confounding factor.” According to Foldes, discrepancies between utilization rates raised “questions about what DHS is buying” from both the managed care and fee-for-service models, and deserved further study.

Intervening years

Since 1993, the managed care model has remained Minnesota’s principal vehicle for the delivery of medical care to public program enrollees. Minnesota continues to bundle state and federal funds into “capitated payments” that are disbursed to HMOs for the administration of public health care programs such a Medical Assistance and MinnesotaCare. Only in the past year has DHS started to change the methodology by which it assigns capitated payments to HMOs (as well as the rate structure for the payments themselves). Such changes have come about in response to controversies over the profit margins and transparency of the HMOs currently administering state programs.

2012 RFP

Nearly two decades after its 1993 study, DHS is preparing to revisit the question of whether managed care has accrued benefits to the State of Minnesota.

The recent DHS RFP seeks a “qualified vendor” to examine two separate issues:

1. “The value of managed care for state public health care programs,” and;

2. “Whether Minnesota’s statutory requirement for health maintenance organizations to participate in these programs as a condition of state licensure continues to be necessary …”

The inclusion of the later query raises interesting questions about whether the state and its HMOs may be tentatively exploring a mutual parting of ways, given the level of scrutiny that has attended HMO-administered public programs as of late.

Proposals are due to DHS on October 29th, 2012.