Report: TennCare ‘Not Financially Viable’

Published February 1, 2004

A management consulting firm hired to evaluate the financial viability of TennCare, the state’s troubled Medicaid program, issued the first of a two-part report on December 11. The prognosis was bleak.

“Our assessment is that, even with current and planned improvement efforts and solid program management, TennCare as it is constructed today will not be financially viable” over the five-year evaluation horizon, concluded analysts for New York-based McKinsey & Company.

“TennCare will consume 36 percent of total state appropriations in fiscal year 2008 (up from 25 percent in 2003),” concluded McKinsey & Company, “and its cost growth in that year will represent 91 percent of new state tax appropriations.”

“This has been a sobering day for me,” said Tennessee Governor Phil Bredesen upon receiving the consultants’ report. “The news is not good.”

Bredesen had asked BlueCross BlueShield of Tennessee, Hospital Corporation of America, the Tennessee Farm Bureau Federation, 22 hospitals within the Tennessee Hospital Association, and Vanderbilt University to fund a study of TennCare. The group engaged McKinsey & Company to conduct the evaluation.

Ambitious Program

Launched in 1994, TennCare represents, the consultants write, “an historic effort to implement managed care for Tennessee’s entire Medicaid population and expand insurance coverage to the state’s uninsured and uninsurable residents.” The program’s budget has increased dramatically over the past decade and currently rests at $6.9 billion, of which the state pays $2.1 billion. The federal government picks up the remaining cost.

McKinsey & Company project the program’s costs will reach between $11.8 and $12.6 billion by 2008. Program design features, program execution, and the overall health care environment are cited by the consultants as contributing factors to the program’s growth. For example,

  • TennCare’s benefits have few limits. “It’s really one of the only programs that has, almost across the board, no limits on scope and duration of coverage,” said Vivian Riefberg, a partner in McKinsey & Company’s Washington DC office. While most state programs limit the number of drug prescriptions an enrollee can fill per month, limit the number of hospital days the program will pay for, or require substantial co-pays, TennCare services are provided “as medically necessary,” with no ceilings. TennCare requires co-pays only from its non-Medicaid beneficiaries. McKinsey & Company estimates increased prescription drug costs alone will account for 56 percent of TennCare’s growth between 2004 and 2008.
  • TennCare’s design provides for inadequate cost control measures. For most services–including inpatient, outpatient, and home health care–the state works through managed care organizations (MCOs) rather than provide the services directly. According to McKinsey & Company, the cost controls implemented by the MCOs have been “inadequate.” According to the report, “a series of high-profile MCO bankruptcies … left providers absorbing financial losses for millions of dollars in unpaid claims.” In July 2002, the state assumed the financial risk for all TennCare enrollees, and the MCOs now operate as administrators only.

Ticking Bomb

“The TennCare bomb has been ticking away for years, keeping no secrets about its volatility,” editorialized the Memphis Commercial Appeal in December. Health Care News has covered the TennCare story for years, documenting several reasons for the program’s failure:

  • It is far too ambitious, enrolling too many people. “TennCare insures 1.3 million residents–a higher percentage of a state population on a Medicaid expansion program than anywhere else in the country,” wrote the McKinsey & Company consultants. Currently, 24 percent of the state’s population is enrolled in the TennCare program. Nearby states, such as Alabama, Kentucky, Mississippi, and Missouri, enroll roughly one-third to one-half as many people in their Medicaid programs.
  • TennCare enrolls a higher percentage of adults than children. In most other states, children represent more than half of the Medicaid beneficiary population. On average, adult Medicaid beneficiaries require more care than do children.
  • TennCare enrolls all high-risk and medically uninsurable residents, as the state abandoned its stand-alone high-risk insurance pool. While middle- and upper-income TennCare enrollees with pre-existing conditions do pay monthly premiums, those premiums are not risk-based and never generate the revenue needed to cover actual medical costs.
  • TennCare provides generous benefits, better in some respects than the plans offered by some private-sector employers. Although many employers, for example, do not offer prescription drug coverage, 22 percent of TennCare’s budget pays for the drug benefit.
  • TennCare’s generosity acts as a magnet, drawing in an uninsured population from surrounding states. And the relative ease with which sick people can qualify for TennCare–one need only document having been turned down for private insurance–the system encourages people to wait until they need medical care before obtaining coverage. Many healthy Tennesseans have dropped private insurance knowing they will qualify for TennCare after they get sick.

Other factors beyond the state’s control have contributed to TennCare’s woes. Although health care spending moderated in the mid-1990s, most observers predict escalating health care cost increases in the future, for both public- and private-sector health care programs, for several reasons:

  • Advanced medical technologies are driving hospital spending up as physicians are now able to do more than they used to.
  • New federal and state benefit mandates require Medicaid to cover products and services otherwise not provided.
  • Utilization of prescription drugs is rising rapidly as new drugs are being discovered and aggressively marketed.
  • The aging of the nation’s population means more people, especially those with lower incomes, will face more chronic health problems in the future.

Reform Needed

“There can be no more delays in addressing the TennCare problem,” warned the Commercial Appeal in December. “The administration and the General Assembly have known the program was in a critical state for some time. They must now find the will to act, in a bipartisan fashion, and prevent the collapse of a program that was born of the best intentions and now is in critical need of reform.”

The second part of the McKinsey & Company report, expected in January, will offer recommendations for making the program viable. Bredesen, who would not discuss possible TennCare reforms with Health Care News in advance of the consultants’ report, nevertheless promised “far-reaching” solutions, rather than short-term fixes, are in the works.

One immediate fix would be to drop from TennCare the 250,000 enrollees not eligible for Medicaid. Such a move would solve the problem for only a year and a half, said the governor, leaving unaddressed the underlying issue of 15 percent annual growth in TennCare costs.

The governor said he is trying to develop solutions while being “sensitive” to the fact TennCare has helped thousands of people. “I very much want to preserve it. It does help so many people. But in the end, we can’t allow TennCare to bankrupt the state.”

Conrad F. Meier is managing editor, and Diane Carol Bast is editor, of Health Care News. Meier’s email address is [email protected].

For more information …

See “Reforming an Ambitious State Health Care System,” Intellectual Ammunition, July/August 2000, and “Tennessee Taxpayer Revolt,” Health Care News, August 2001,

The 38-page McKinsey & Company report, “Achieving a Critical Mission in Difficult Times — TennCare’s Financial Viability,” is available through PolicyBot. Point your Web browser to, click on the PolicyBot button. and search for document #14205.

The consultants’ 21-page explanation of their “Modeling Methodology and Assumptions” is also available through PolicyBot; search for document #14206.