Policy Documents

Reforming an Ambitious State Health Care System

Patrick S. Poole –
July 1, 2000

On May 7, 2000, the Tennessee Institute for Public Policy released Policy Study 115, "A Proposal for Comprehensive TennCare Reform." Copies of the 44-page report may be obtained from the Tennessee Institute for Public Policy at P.O. Box 23348, Nashville, TN 37202. Call 615/327-3120 or visit www.tnpolicy.org.


On January 1, 1994, Tennessee embarked on an ambitious course to fundamentally change the state's Medicaid system. The stated intent of the new program­-TennCare-­was to implement a managed care system to control the runaway growth of Medicaid expenditures seen during the close of the 1980s and the beginning of the 1990s under the fee-for-service payment system. The anticipated managed care savings would then be used to expand coverage to the uninsurable and the non-poor uninsured.


Demise Inevitable

To accomplish this feat, then-Governor Ned McWherter requested a Section 1115 waiver from the federal Health Care Financing Administration (HCFA) to mandate managed care for all TennCare enrollees and to allow coverage for those not eligible under Medicaid. After receiving HCFA approval, the state contracted with 12 managed care organizations (MCOs) to provide health care services to the entire TennCare population under a capitated rate payment system.

Six years later, TennCare teeters on the brink of complete collapse. Most of the savings associated with managed care have not been achieved through better utilization of health care services, but rather by deliberately under-estimating the capitated rates paid to MCOs, which passed off those losses to health care providers. The net effect has been a decline in the overall quality of health care for all Tennesseans.

Recent developments have made the demise of the program all but inevitable. Chief among the causes is the December 15th announcement by Blue Cross/Blue Shield of Tennessee-­the largest TennCare MCO, covering one-half of all enrollees--that it would be withdrawing from the program effective June 30, 2000.


Obstacles to Effective Reform

While universal coverage and single-payer system proposals have gained some attention, no other state has embarked on such a grandiose effort down those paths. Incorporating those goals into our state's Medicaid system has created a program difficult to maneuver and finance, while erecting substantial barriers to reform.

The following obstacles need to be addressed to prevent further complications in providing a health care safety net for Tennessee's indigent and medically needy populations.


Obstacle 1: TennCare is attempting to serve nine different populations with one product.

There are four distinct populations with Medicaid eligibility: poor children and adults, the near-poor insured, the disabled, and the elderly. Another five categories have been added to the Medicaid-eligible population within TennCare: uninsured children, the mentally ill, uninsured workers, Medicare supplemental, and the uninsurables denied insurance due to health risks.

The best way to serve so many distinct populations would be to empower enrollees themselves with the tools to choose what plan on the private market best fits their health needs. In concept, this is what TennCare was supposed to be, although Medicaid mandates and self-imposed program designs have all but eliminated plan variation among Tennessee MCOs.


Obstacle 2: TennCare is out-of-line with state Medicaid programs on the regional and national levels.

Tennessee has the 7th largest Medicaid enrollment in the country, despite having only the 17th largest population. In 1998, Tennessee had the 2nd largest Medicaid population of any state as a percentage of the state's population­20.1 percent. The national average is roughly half that figure, at 10.4 percent.


Obstacle 3: TennCare has extended health care entitlements well beyond the indigent and medically needy.

Among Medicaid programs, Tennessee's has the greatest non-poor population in the country at one-third of TennCare enrollment­-74 percent above the national average.

The reason for this is readily evident. By enrolling in TennCare, enrollees are able to shift most or all of their health care costs to the taxpayers­-an attractive proposition. For instance, in fiscal year 1998 TennCare collected only $36 million from more than 500,000 non-poor uninsured and uninsurable enrollees required to pay premiums. For that year, the average premium payment from this non-poor population was $72, compared with the $2,867 per-recipient cost for that year.


Obstacle 4: TennCare has caused the quality of health care to decline for all Tennesseans.

Most of the touted "savings" have not come from better utilization of services, but have been passed off as losses to health care providers.

Since the inception of TennCare, 11 hospitals across the state have closed, five in the last 18 months alone. Hospitals are looking at limiting or closing needed services simply due to the mounting financial pressures attributed to TennCare. Vanderbilt University Medical Center, for example, has considered turning away non-emergency TennCare patients.

The TennCare-related losses experienced by hospitals and doctors have ripple effects that extend to those covered by private insurance as well. Provider losses are either passed along to those with private insurance, or services are eliminated altogether.


Obstacle 5: TennCare is stressing the state budget to the breaking point.

Since fiscal year 1990, the largest budget category increases in Tennessee have been for health and social services, climbing 231 percent, most of which is dedicated to TennCare/Medicaid. Not only has health and social services spending outstripped every other major budget category over the past decade, but with its current rate of growth, TennCare will consume more state dollars than K-12 education within the next five or six years.

TennCare was intended to save Tennessee from double-digit growth in Medicaid spending, not condemn us to it. The average growth of TennCare over the past three years has been 14.7 percent-­well above the growth rate seen in most other states. With other areas of the state budget, such as higher education or safety, in need of attention, it is imperative that the state begins to look at ways to bring TennCare back under control.


A Proposal for Reform

State leaders have two options for addressing this crisis. The choices could not be more pronounced.

A "public society" approach would encourage greater government intervention in the health care provider and insurance sectors. Efforts to prop up TennCare in this way would result in increased costs for consumers with private insurance coverage, run-away health care spending growth in the state budget, and further decline in the quality of health care services available to Tennessee citizens.

A "civil society" approach, by contrast, would reverse the present course of consolidation and health care homogenization and incorporate realistic private alternatives to allow the free market to distribute health care resources more efficiently. Several solutions are available to lawmakers who choose the "civil society" course of action:


Solution 1: Reform eligibility and expand efforts to attack fraud and abuse.

TennCare's public image has been marred by repeated revelations of gross fraud and abuse over the past year. Former TennCare director Brian Lapps told a Nashville newspaper recently that as many as 200,000 to 250,000 enrollees were ineligible for the program, and BlueCross/BlueShield was discovered selling "denial letters" to health insurance applicants for $25 to qualify for TennCare. Company officials explained they were simply meeting demand.

There are several remedies to problems such as these. Most important is that TennCare perform its annual verification of the rolls in compliance with HCFA requirements under the Section 1115 waiver. Another remedy is to dedicate more resources within the Tennessee Bureau of Insurance's Medicaid Fraud Control Unit.


Solution 2: Implement market-based Medicaid reforms.

Because consumers of health care under Medicaid do not pay for the services they use, rising health care do not lower the demand for services by this population. They consume services more frequently and typically use more costly care than do consumers paying for services with private insurance.

To address this effect, a few states, such as Minnesota, have introduced cost-sharing for Medicaid recipients, similar to measures used in private managed care programs. The primary cost-sharing provisions in Minnesota are a 10 percent coinsurance for inpatient hospital stays, a $3 copay on prescription drugs, and a 50 percent coinsurance for dental.

Medicaid reform also must emphasize personal responsibility and provide flexibility to accommodate each recipient's needs. These goals can best be accomplished through health insurance vouchers and Medisave accounts for the non-elderly and non-disabled. These measures would separate the standard risk population (poor children and adults and the near-poor uninsured) from the high-risk population (the elderly and the disabled), providing the former with a transition into the private insurance sector.


Solution 3: Create a stand-alone children's health insurance program.

Under the State Children's Health Insurance Program (S-CHIP), there are three separate approaches to creating a program for uninsured low-income children: expand Medicaid, set up a stand-alone program, or create a program that combines Medicaid and stand-alone features.

There are significant problems with the first approach, S-CHIP Medicaid expansion. Medicaid coverage is expensive due to mandates and other regulations that extend well beyond S-CHIP requirements. Thus, Tennessee's Medicaid expansion results in limiting the number of children under the S-CHIP program.

If it were to create a stand-alone program, the state would have many options available to it. A state that chooses this approach may introduce limited cost sharing and target specific age groups or geographic areas with a concentrated number of uninsured children. An extra benefit is that from a financial perspective, creating a stand-alone S-CHIP program maximizes the benefit from the federal S-CHIP allotment.


Solution 4: Re-establish a high-risk pool for uninsurables.

One of the most costly decisions associated with the formation of TennCare was to open enrollment in the program to categorically non-poor uninsurables. This decision has resulted in tremendous financial pressure on TennCare MCOs, to the point that their inclusion in TennCare is unsustainable. For instance, 10 percent of all TennCare enrollees, most enrolled as uninsurable, account for 47 percent of all TennCare prescription costs.

Continuing to extend the Medicaid entitlement to the non-poor uninsurables is unsustainable. The solution is to revive the Tennessee Comprehensive Health Insurance Program (TCHIP) high-risk pool, modifying it to incorporate "best practices" of other states. Capping premiums at 125 percent of private insurance levels, for example, would increase the reach of the program into lower income classes while at the same time moving marginal cases back into the private sector.


Solution 5: Transition the uninsured back to the private sector.

When TennCare began in January 1994, the problem of insurance portability was growing more pronounced. TennCare was seen as an alternative.

However, the federal Health Insurance Portability and Accountability Act of 1996 (HIPPA) mandates portability and guaranteed renewability of insurance in many situations. This new federal law makes TennCare eligibility for the uninsured redundant. Those TennCare recipients are now able to go out into the private marketplace and obtain insurance. But due to the generous benefits package and low, taxpayer-subsidized premiums, few have been willing to leave TennCare.

To help the low-income uninsured obtain and maintain health insurance after leaving TennCare, the state could offer income-graduated vouchers to assist with the cost of the transition. The subsidy, though, should decrease gradually each year, with the program mandated to be closed in five to seven years.


Solution 6: Increase charity payments to providers and create a statewide charity care network.

In restructuring TennCare, consideration should be given to increase funding for charity care. Encouragement should be given for the establishment of local-based charity care networks built off of the state-supported hospitals in each region.


Solution 7: Separate mental health services from TennCare.

Because of the very limited savings associated with managed care for the mentally ill and the delicate and cost-intensive nature of this small population, the state's mental health efforts ought to be separated from TennCare altogether and redesigned to ensure access and appropriate funding for all service providers.

The expansion of Medicaid entitlements beyond the indigent and the medically needy fundamentally altered the purpose of the state's Medicaid program. The double-digit health care cost increases that prompted Governor McWherter to begin TennCare have returned with a vengeance, making the program financially unsustainable. In order for TennCare to survive, it must undergo much more than superficial reforms.

Attempting to extend the life of the current TennCare program through higher taxes and heavy-handed regulation of the private insurance market would create more problems than it would solve. The decline in the quality of health care for all consumers would continue, and the higher insurance premiums that would result would drive even more people into the ranks of the uninsured.