June 20, 1985

214 Massachusetts Avenue, N.E. Suite 400 Washington, D.C. 20002 (202) 547-4646


NATIONAL CHAIRMAN Hepreiantatlva BUI Caverha Texas FIRST VICE CHAIRMAN Senator Norm* RUBMH South Carolina SECOND VICE CHAIRMAN Representative Roy F. Cagle Missouri TREASURER The Honorable Larry Pratt Former Member Virginia Legislature SECRETARY Representative John H. Brook* Idaho IMMEDIATE PAST CHAIRMAN Senator Donald E. Lukana Ohio Tha Honorable Brad Cataa Former Member New Mexico Legislature Repretentatlve David Copeland Tennessee Repretentailve David Halbrook Mississippi Senator Owen Johnson New York Senator John R. McCune Oklahoma Tha Honorable Robert B. Monler Former Member New Hampshire Legislature Ataemblyman Patrick J. Nolan California The Honorable William M. Polk Former Member Washington State Legislature Representative William Presnal Texas Rapri tentative Penny Pullen Illinois Senator William Ragglo Nevada Delegate EH an Sauarbrey Maryland Senator Eva F. Scott Virginia Rapreaentatlve T.W. Stivers tdaho Senator Ray A. Taylor Iowa The Honorable Donald L. Totten Former Member Illinois Senate

Ms. Catherine Yoe Tobacco Institute 1825 Eye Street, N. W. Suite 800 Washington, D. C. 20006 Dear Cathy: Enclosed is the information we discussed on health care that our organization has done. I hope that this is of help to you. We all enjoyed our meeting last week. We look forward to developing a better and closer working relationship with all of you at the Tobacco Institute, Again, thank you for your support and interest. I look forward to seeing you again soon. Please call if there is anything that you think we might be able to help you with. Sincerely,

Vonnie Borie Legislative Director


The nation's oldest and largest individual membership organization of State Legislators



By Brian Young




Officers of the American Legislative Exchange Council
Chairman Hon. Bill Ceverha Texas House of Representatives First Vice Chairman Hon. Norma Russell South Carolina Senate Second Vice Chairman Hon. Roy R Cagle Missouri House of Representatives Treasurer Hon. Larry Pratt Former Member, Virginia House of Delegates Secretary Hon. John Brooks Idaho House of Representatives immediate Past Chairman Hon. Donald E. "Buz" Lukens

Ohio Senate

Executive Director Kathleen Teague

American Legislative Exchange Council 214 Massachusetts Avenue, N.E. Suite 400 Washington. D.C. 20002

(202) 547-4646


Containing Health Care Costs: The Arizona Experience .

Containing Health Care Costs: The Arizona Experience By Brian Young American Legislative Exchange Council T124520335 .

The AMERICAN LEGISLATIVE EXCHANGE COUNCIL (ALEC) is the nation's oldest and largest membership organization of State Legislators. A non-profit. The views expressed herein are those of the author and do not necessarily reflect the views of the American Legislative Exchange Council. Dornan (CA) and as Counsel to the Senate Subcommittee on Aging. limited government. ALEC is dedicated to the principles of free enterprise. BRIAN YOUNG is the Administrative Director of ALEC. TI24520336 . and traditional values. ^Copyright 1984 by the American Legislative Exchange Council.. non-partisan public policy and research group. This book is provided as educational material and is not an attempt to aid or hinder the passage of any bill before Congress or State Legislatures. A member of the California State Ban he has served as Executive Assistant to Congressman Robert K. Family and Human Services chaired by Senator Jeremiah Denton (AL).


your members have been of tremendous service to America." President Ronald Reagan TI24520338 . ALEC has been in the forefront of the effort to return as much power and resources to levels of government closest to the people. Your Jeffersonian philosophy of government is an effective counterweight to the ever present pressures of greater centralization.) "In the decade since ALEC was established. and the people in your districts around the country. your fellow legislators. and all Americans owe you a great debt of gratitude.

While those costs continue to multiply. but also finance Medicaid through state and federal taxes. Representative Bill Ceverha (TX) ALEC National Chairman 1 T124520339 . however. As National Chairman of ALEC.PREFACE Health care expenditures in the United States have risen 773 percent since 1965. The delivery of quality medical treatment to the needy remains the focal point of any examination of Medicaid programs. This report discusses the issues which have arisen in the Arizona experience concerning the standard of care which patients receive. As this study by the American Legislative Exchange Council points out. do the burdens on the taxpayers who not only pay for their own health care. the problems it faces and the mechanisms it employs will be part of the continuing Medicaid discussion in the Eighties. including the opinions of those involved inside and outside of the state system. I know that State Legislators across the country will read this volume with keen interest to examine the Arizona program and the ambitious ways in which it attempts to deal with state-provided health care. so too. cost is not the sole consideration in the indigent health care issue. Whatever the outcome of the Arizona experiment.

/ ACKNOWLEDGEMENT The American Legislative Exchange Council gratefully acknowledges those individuals and corporations who generously provided technical assistance and support for this project. TI24520340 .

with the states assuming anywhere from 22 percent to 50 percent of that ever-increasing cost. In 1965. Medicaid has grown to a $33 billion program. which do not enjoy the federal government's luxury of spending money it does not have. To Arizona's credit. In the 19 years since that enactment. a nationwide health insurance plan for the aged and disabled. and Medicaid. Congress enacted what are now the nation's two largest health care programs: Medicare.INTRODUCTION Both Congress and state legislatures are facing a health care funding crunch. is receiving federal Title XIX (Medicaid) funds. are looking for ways to control their health care expenditures. the expenses of providing medical treatment to the indigent continue to rise faster than the inflation rate. It has embarked on the broadest state health care system of its kind and. a state-operated and administered program for low income persons. Many more are considering ways to reduce the expenses of indigent health care delivery while still trying to provide quality medical treatment for the needy. It is this state share that causes concern in capitals from Honolulu to Boston. This experiment is being closely watched by TI24520341 . This means that Medicaid programs are undergoing more than routine examinations. At least 19 states reduced funding for their Medicaid programs in 1983. Most states. for the first time in its history. While budgets are getting tighter. it is tackling the problem head-on.

Congressman Eldon Rudd 4th District. This study by the American Legislative Exchange Council accomplishes that purpose.) legislators and the health care community in every state. It also continues ALEC's tradition of providing state lawmakers with the necessary information for crucial legislative decisions. it is important that the facts about the Arizona Health Care Cost Containment System. This report will be an invaluable tool to all legislators working on Medicaid reform. as well as the issues it raises. and it could have a profound impact upon state Medicaid programs for years to come. concise manner. For this reason. Arizona TI24520342 . be outlined in a clear.

the Arizona plan establishes a "gatekeeper" approach where people select an exclusive health care provider. The program began operation on October 1. financed a new system of health care delivery in the state. Arizona was the only state in the union not to have a federally-funded indigent health care program under Title XIX of the Social Security Act (Medicaid).EXECUTIVE SUMMARY The Arizona Health Care Cost Containment System (AHCCCS) represents the most revolutionary attempt by any state to control the escalating expenses of health care delivery. it could profoundly change the medical industry. could no longer bear the burden of rapidly rising costs. Resistance to federal assistance in this area finally broke down when the state's counties. together with state and county tax dollars. which financed the indigent health care system. or even a county 5 . Rather than have patients who are enrolled in the system choose their own physician whenever they get sick. but it also aims to include virtually every person in the public and private sectors of Arizona. 1982. AHCCCS contains several components that distinguish it from traditional Medicaid programs. or a hospital. Prior to AHCCCS. Not only does the more than $180 million a year program overhaul the state's system for providing health care to indigents. If successful. A provider may be a consortium of doctors. Following negotiations with the federal Health Care Financing Administration. Arizona obtained waivers to certain requirements in the Title XIX law and received federal funds which.

working people would be able to elect to have AHCCCS as their health insurance plan." It does. Income and assets tests determine those who qualify as either indigent or medically needy. there are three classifications of AHCCCS eligibility: categorical. While the gatekeeper system is designed to guard against overutilization by the patient. which designers of AHCCCS claim is necessary to effectively reduce all health care costs. (MCAUTO). Prior to March 15. however. Inc. Instead of the standard fee-for-service method of reimbursement' employed in traditional Medicaid programs. eliminate the patient's choice of hospital./ health department. If and when it becomes available. eligible patients enrolled with a private program administrator. Since that date. indigent. he refers the patient to a specialist who has already subcontracted with the provider. he must then enroll in AHCCCS. Eligibility and enrollment are two separate processes. specialist. Providers in AHCCCS are selected on a competitive basis. Arizonans who receive federal assistance under the Supplemental Security Income or Aid to Families with Dependent Children programs are categorically eligible to participate and are automatically enrolled. AHCCCS uses capped prospective payments to health care providers. One of the most controversial components of AHCCCS is its proposed inclusion of public and private sector employees. Businesses in Arizona are closely watching AHCCCS for this reason. he can only go to that provider for treatment. Once a person is declared eligible for the program by his local county office. This is designed to maintain a continuity of care. pharmacy. Doctors who contract with the state receive the same advance monthly payment regardless of the number of patient visits or the expenses involved in their practices. MCAUTO Systems Group. these employees would have to be given a choice between the state plan and at least one private insurance plan. the 6 . For the indigent population. no date has been set for this expansion of the program. thereby preventing the costly practice of "physician shopping. and medically needy. though. Under law. prepaid capitated financing is designed to discourage overutilization by the physician. If the doctor at the provider's office cannot give the needed care. 1984. As yet. Those submitting bids to the state are expected to supply certain minimum services to qualify for the provider selection process. In no instance may a person receive care without first goingthrough his gatekeeper physician. or other places to seek care. Whenever a person needs medical care.

As a result. withdrew from the program in March 1984. the treatment of those ineligible patients brought problems for those hospitals. many of whom required much greater care than providers had anticipated. Due to a serious contractual dispute. AHCCCS was not prepared to handle the initial crush of applicants. the private administrator. After the person establishes eligibility with the county and enrolls with the state. who becomes his gatekeeper to the system. leaving the state to assume its responsibilities. If the person does not select a provider after two to three weeks. could not send a capitated payment to the provider until the patient was enrolled. a "rocky road. he will be assigned to one by the state. in the words of one State Senator. It seems MCAUTO spent its three-year $11. in turn. MCAUTO. he selects a health care provider. The implementation of AHCCCS thus far has been. including the enrollment process. Partly because of a bureaucratic decision to issue temporary documents to those not yet declared eligible. to the overly ambitious time frame to which AHCCCS committed itself. however. In turn.*' Many people within and without the program attribute early problems.State Department of Health Services has assumed enrollment responsibilities previously handled by MCAUTO. especially those related to enrollment of indigents and reimbursement of hospitals.5 million budget in approximately one year and had sought an additional $24 million prior to leaving AHCCCS because of alleged non-payment by the state. pharmacies. These amendments were not the only changes in the enrollment process. and health care specialists were left with bad debts for which no one would claim responsibility. Lawsuits were filed against providers who have now posted security deposits with hospitals so that the hospitals will continue to accept AHCCCS patients. Recent amendments passed in the 1983 Arizona legislative session are designed to minimize enrollment problems through faster processing of eligibility applications. and other subcontractors who sought reimbursement from an AHCCCS provider. These providers could not pay for the care because the patients were not actually in the program. 7 . A number of hospitals. doctors. All assignments are made to the lowest bidding provider in the county in question. Observers state that the program started before proper operating mechanisms were in place. many received unauthorized care. The state. Those who sought eligibility through qualification under one of the income tests for indigency experienced difficulties with the enrollment process.

no one can make conclusive judgments as to the quality of the treatment that is being provided. There is anxiety in the private sector that AHCCCS may be perceived by the general public as providing a lower quality of care simply because it serves indigents. simply collecting their monthly fees and ignoring their patients. Supporters of AHCCCS state that program monitoring will control any misfeasance in treatment and that the structure of the system itself. 1985. The worry is that short-term savings will result in long-term stagnation in the development of innovative medical treatment. Another concern is that if prices for medical products. The fear is that this practice may lead to aggravated conditions in patients and cause greater medical bills as illnesses get worse. A complete analysis of AHCCCS will be made by a private research firm at the end of the three-year experimental cycle and the state legislature has requested its own independent examination of the program. companies will no longer be able to afford the extensive research and development that has brought forth the means for improved patient care. until September 30.} Monitoring of the project continues. The AHCCCS experiment is set to run for three years. How it fares could determine the shape of health care programs for years to come. are kept artificially low through price controls. MCAUTO. did not even have a full time medical director with which to monitor the quality of care between February 1983 and February 1984. The program is being evaluated on a yearly basis by the federal Health Care Financing Administration. hospital equipment. A coexistent fear is that people would be skeptical of a system where the doctor's profit margin depends on the amount of care he provides. The most crucial issue to be evaluated in the AHCCCS experiment is the quality of care received by indigent patients. with a gatekeeper to keep track of every patients care. Such perceptions would reduce the likelihood of the programs acceptance by public and private sector employees if and when AHCCCS becomes available to them. 8 TI24520346 . Others worry that doctors may become mercenary. or pharmaceuticals. Some express concern that a doctor who is worried about his profit margin under a capitated approach will skimp on care to hold down expenses. will improve the treatment received by indigents. As yet. Detractors counter that the former program administrator. such as prosthetics. but opinions are forming among those in and out of the program.

states. territory.ARIZONA INDIGENT HEALTH CARE PRIOR TO AHCCCS While not admitted to the Union until 1912. In 1887. the Medicaid program. As years passed. County Boards of Supervisors were charged with the responsibility of making health care available to the poor people living within their jurisdictions. minor alterations were made in the system. The Grand Canyon State continued its resistance to federal money and the strings attached thereto throughout the 1970s. Arizona has maintained some form of organized health care for indigents since 1864. the year after its organization as a U-S. yet Arizona indigent health care remained essentially unchanged into the Twentieth Century. "We offered the same concept [as 9 . Title XIX of the Social Security Act. By 1973. an amendment to the 1864 code eliminated the requirement that an "unemployable'1 person first had to seek help from his relatives. but initial efforts were made to establish some sort of statewide Title XIX plan. was passed by Congress in 1966. Representative Burton Barr. every state in the nation except Arizona had enacted some type of Medicaid program. Thus was born the tradition of county-provided assistance. House Majority Leader for the past 17 years. It was then that Arizona codified a system of county-funded health care for "unemployables" who did not have relatives capable of providing them with financial support.

more broad income 10 . It authorized the Department of Health Services to establish a Medical Assistance Program. The Arizona Supreme Court subsequently enjoined further action by the State pending the satisfaction of three requirements: that the legislature would have to set standards for determining a spending ceiling for the Medicaid program. If individuals were not in one of these categories. of course. Concern over escalating costs and abuses reported in other states kept the program on the drawing board. work on the 1974 Medicaid program came to a grinding halt.. counties. the crucial step from authorization of funds to appropriation of funds was never taken. approximately 38 percent was swallowed by hospital bills alone. However. costs escalated to over $100 million. By Fiscal Year 1979. that it would have to appropriate money. in 1981. While counties paid the expenses. In 1977. with implementation to begin in October 1975. It became crystal clear that county governments were being overwhelmed with indigent health care costs—costs that showed no signs of abating. With the Court's decision. to $125 million. It's something that had been thought about for quite some time. Unfortunately. Of that amount. All public welfare recipients and foster home children whose care was paid from state or federal funds were automatically eligible for their county's program." The Arizona legislature did enact a Medicaid bill in 1974.) AHCCCS] to the Nixon Administration and they refused it. Arizona counties spent almost $50 million to treat the poor. and. worried over the cost burdens they would be asked to assume under the 1974 Medicaid bill. Projections for 1985 were approaching $250 million in costs to the counties. the Arizona system provided authority to the State Department of Economic Security to establish statewide eligibility standards for indigent health care. contending that implementation of the program was illegal. Twenty to 25 percent of all county revenues were expended on health care delivery and administration.. that it would have to communicate to the Department of Health Services funding levels and permissible expenditures. state minimum income and assets tests were applied. sued the State. In Fiscal Year 1974. Counties did have the option of establishing their own. county expenses for indigent health care did not.

Meanwhile. local taxes. An attempt in 1980 by DES to implement uniform standards on a statewide basis met with legal opposition and was never enacted. A concensus emerged that the counties and the State had reached a crisis point. Seven of the then fourteen counties exercised this alternative. 11 TI24520349 . increased to the point where an Arizona-styled "Proposition 13*' taxpayer relief measure was approved by voters in 1980. which financed the health care system. More affluent urban counties had the added pressures of rapid population growth and increased demands for indigent care. setting income levels above the DES criteria.eligibility amounts. Rural counties felt the pinch as property and business taxes no longer rose to cover spiraling expenditures.

" states Senator Carl Kunasek. but also a farreaching step beyond the traditional Medicaid program. Chairman of the Senate Health Committee. where patients went from doctor to doctor until they heard what they wanted to hear or got the prescription they wanted to get. "One of them was physician shopping. Primary Care Physicians as Gatekeepers "We (in the Arizona legislature) felt abuses in other states were due to various reasons.AHCCCS—A BRIEF PROGRAM DESCRIPTION i The Arizona Health Care Cost Containment System (AHCCCS) began operation October I. Described in the AHCCCS 1982 Annual Report as a "boldly experimental approach to health care financing." it joins a number of mechanisms that the State hopes will build a cohesive service delivery network. Its elements attempt to make health care recipients and providers alike more cost conscious without sacrificing quality medical care. Arizona must make it work by September 30. 1985. 1982. A person may not obtain medical care in the AHCCCS system with13 j [ ' ! i TI24520350 . We addressed that with our gatekeeper approach. A health care system of this type has never been attempted before on a statewide basis. it marked not only Arizona's first-ever federal funding for indigent health care." The so-called gatekeepers are primary care doctors who act as the patient's entry into the maze that is modern health care.

referrals to specialists. The health care provider is placed at risk for the expense of medical treatment. If someone else is paying. the gatekeeper must be a family or general practitioner.'* Prepaid Capitated Financing While the gatekeeper approach guards against overutilization by the patient. what's the difference if you stay in the hospital three days or five days or seven days?" 14 TI24520351 . or obstetrician/gynecologist. This means that an AHCCCS patient may not see a specialist or be admitted to a hospital without the authorization of his case manager who. not the state or the program administrator. which can be a consortium of doctors. the health care provider's profit is determined by the cost of the treatment he gives and by the number of illnesses suffered by the people under his care. The provider.> out first going through his or her gatekeeper. with higher amounts awarded for some Supplemental Security Income patients. an HMO. the provider pays for all medical expenses incurred by its patients. The average monthly prepayment is approximately $80 per enrollee. AHCCCS Deputy Director Jim Matthews states. Because of the wide range of services offered in AHCCCS. The amount received from the AHCCCS program depends on the category of person enrolled in the provider's system. There is an incentive to provide the least expensive care. Monthly allotments range from about $60 to $125 per patient. says House Majority Leader Burton Barn "They've been funded in such a way that there is no reason not to use the system to the fullest. a hospital. but there is also an incentive to keep people well. This contrasts with more traditional Medicaid programs where. in effect. including tests. From this pool of money. becomes the patient's personal physician. prescriptions. pediatrician. and hospitalization. In the AHCCCS program. "The attempt is to combine his decision making process—'Does this make good medical sense and does this make good financial sense?**—kind of meld those two decisions together. or even one of the counties. general internist. receives a set amount of money per month for each patient enrolled in the program. The costs of treatment come directly from the provider's pocket. prepaid capitated financing discourages overutilization by the physician.

for example. pharmacies. If a provider happened to serve a number of patients who developed catastrophic illnesses. A key to the system's plan to curtail costs. the sicker the clientele.'* Co-payments by Patients As with the gatekeeper approach.Still. this device is intended to discourage overutilization of the system. Providers have the option 15 . the bidding is designed to reward those providers who can deliver health services at lower costs. either through their own organization or through subcontracts with specialists. a provider serves patients only from the county in which he is located. With competition a cornerstone in the AHCCCS plan. Former Arizona Medical Association President John Oakley notes. The prepayment aspect of the AHCCCS system is further explored in the "Quality of Care" section later in this study. the system has an insurance fund to cover single patient expenses over $20. though. but may give care to those from an adjoining county if net travel for health care is reduced for individuals residing there. there are three more providers in AHCCCS after the completion of the second year bid process. In the second year. '*people can*t get over the mountain in winter to get services in another town. Generally. In his city of Prescott. state officials had hoped to have more than one provider group in each county so that people could choose the more effective and/or less expensive care. Those submitting bids to the state must be able to offer a full range of AHCCCS services. In five of the fifteen counties. It is considered by some to be the program's most innovative component.000. four counties have just one AHCCCS provider. the more anemic a provider's profit margin. Overall.Fortune could easily play an important role in this system. Competitive Bidding Process Providers may become part of the AHCCCS program only through bidding against other would-be service deliverers in a process administered yearly by the state. there was only one care provider in the system's first year of existence. though. hospitals. that the competition part of the program would not always apply in some parts of Arizona where choices may be limited by transportation problems. To help prevent this. and other health care services. he could be financially devastated.

the federal government gives capped contributions to the State for its enrollees. The federal assistance sent to the AHCCCS program is based upon actuarial rates established through data from both Arizona and neighboring states. at least for non-emergency care. 16 T124520353 . had a county not been served by a statecontracted physicians group or HMO or other provider. Their options to select doctors or hospitals are limited to those with whom their provider subcontracts. as are certain services provided to AHCCCS members under the age of 21. In counties with more than one provider. to receive AHCCCS service. AHCCCS is a prepaid system. Restrictions on Freedom of Choice Standard Medicaid programs rely on fee-for-service reimbursement to health care providers. AHCCCS-eligible indigents may choose one from the list of state-approved providers.I of asking their patients to share the cost of care through nominal charges ranging from 50 cents to five dollars. the point is moot. At no time will the rate exceed 95 percent of the estimated cost of services that were provided under the old county fee-for-service program. Patients are only asked to pay for visits that they initiate. Patients must come only to their officially designated providers. federal aid was based on the estimated number of enrollees times the capitation rate. Appointments recommended by the primary care physician are exempt from the copayment rules. renders medical care and is later paid a set fee for that particular type of treatment. The Arizona plan gives capitated payments to providers. For each person enrolled in the provider's program. the state gives a standard sum. In the first year of the system. As all Arizona counties have at least one AHCCCS provider. a limited fee-for-service system would have been permitted to serve the people of that area. The Medicaid provider. Capitation of the State by HCFA As the State gives capped rates to the providers for their enrollees. who is freely chosen by the indigent patient. Under the AHCCCS law. it requires some limitation on the number of doctors who will receive prospective payments. Quarterly adjustments are made for the actual number of enrollees in the system.

The stated purpose of making virtually the entire population of Arizona eligible for AHCCCS is to control all health costs. emergency ambulance and medically necessary transportation: prosthetic devices. Administrative difficulties. that the public and private employee portion of the system. however. laboratory and x-ray services. regardless of whether the care is given in-house or through subcontractors. One part of the program w not subsidize the other. AHCCCS providers must furnish patients with a full range of health treatment. Private sector employees were to follow. Not furnished under AHCCCS are services or items solely for 17 TI24520354 . not just those for indigents.and two percent from co-payments and interest income. but those who are gainfully employed. if it is implemented. prescription medications: emergency dental care. including the generally healthier middle to upper income workers. Services As previously noted. Program officials stress. and unsuccessful bidding solicitations have delayed implementation of this part of the plan indefinitely. and local governments were to become eligible for AHCCCS in early 1983. similar to private insurance. the plan would spread the risk for health costs to virtually the entire population. "We felt that the broader the base of participation. which are discussed later in this study. county. As Senator Kunasek puts it. public employees of the state. 35 percent from federal funds. Potential Inclusion of Public and Private Sector Employees One of the most controversial elements of the AHCCCS experiment is the proposed incorporation of not just the poor and needy. no decision has been reached as to when or if the non-indigent working population of Arizona will become a part of AHCCCS. and early and periodic screening. diagnosis.Actual funding for the system breaks down to approximately 44 percent from county funds. medically necessary dentures. As of the publication of this report. Benefits available under the program include: inpatient and outpatient hospital and physician services. and treatment (EPSDT) for children. Under the plan. 19 percent from state funds. the better the price would be/* In short. medical supplies. will be separately financed by individual preH'*ms.

services that are experimental in nature (although a heart transplant operation was funded by AHCCCS in January 1984—such procedures may be authorized at the AHCCCS director's discretion). the categorically eligible. the indigent. individuals with incomes between $2500 and $3200 a year (or up to $4266. with an extra $544 added to the limit for each dependent) and who have net resources of less than $30. with an extra $425 added to the yearly limit for each dependent) and have net resources of less than $30.000 may be eligible as "medically needy. 18 TI24520355 . hearing aids. who have yet to be integrated into AHCCCS. Finally. Second. alcoholism and drug addiction treatment. private nurses. long-term and home health care services. First. eye examinations for prescriptive lenses." This group is also required to pay ten percent of their monthly health care costs. those whose incomes are less than $2500 a year (or $3333 if married and living with their spouse. those who receive federal assistance through either Aid to Families with Dependent Children (AFDC) or Supplemental Security Income (SSI) are automatically included in the program. family planning services. and prescriptive lenses (except for those under 21).67 if married and living with their spouse. there are three basic groups of people eligible for care under the demonstration project.000 are eligible as indigents. and the medically needy. except where medically necessary in a hospital.) cosmetic purposes. Eligibility Excluding public and private employees. and certain types of elective surgery.

Because certain provisions of the AHCCCS program are contrary to traditional Medicaid systems. waivers from federal requirements contained in Title XIX of the Social Security Act had to be negotiated. underscore the importance of Reagan administration involvement in the negotiations. In what Senator Kunasek described as "an educational session for all of us. State legislators. though. special government action was needed. "The State does not want to regulate the health industry. crediting it with the increased flexibility required to grant the waivers. "If it wasn't for the White House." In order to "create the marketplace.MEDICAID WAIVERS AHCCCS Public Information Officer Randy Weiss says." however." According to Sidney Triegcr of the Office of Research Demonstration and Statistics at HCFA." HCFA and Arizona officials met repeatedly to work out the details of the new demonstration project.C. D. In the words of Majority Leader Barr. Following an initial inquiry from the Arizona legislature to Secretary of Health and Human Services Richard Schweiker. waiver proposals were discussed in Washington. Phoenix. Arizona at first 19 . It wants to create the marketplace with this legislation and then step back and let it work. AHCCCS wouldn't be here. the site of the federal Health Care Financing Administration's western regional office.. and San Francisco.

and hearing aids.. as well as family planning services. It was felt that since family planning clinics are relatively "free-standing" institutions that they would not be easily integrated into the "gatekeeper" health delivery system. Given this prior deliberation. "The original concept would have excluded the elderly who have access to services through Medicare. This also recognizes how much more difficult it would have been to include as part of the competitive bidding process a long term care component. remain the responsibility of the county to provide. was not a major item of debate. These benefits. an essential part of the AHCCCS program. Congress specifically reaffirmed the Department of Health and Human Services* right to waive freedom of choice under case management delivery systems such as that proposed by 20 . the Department of Health and Human Services had discussed the possibility of handling long term care differently from other benefits under Title XIX." Indeed. The initial plan would have barred the participation of people who could receive health care funding through other third party payer sources. HCFA's Trieger reports that prior to the Arizona waiver application. and Native Americans who may receive Indian Health Service care. That was a major issue in terms of the discussion with the State. Under the 1981 Omnibus Reconciliation Act. Arizona officials state that long term care and home health care are among the most costly and complicated elements of health care delivery. "it did seem to make sense that we would consider just doing the acute care package and not the long term." While the federal government did not yield on the Medicaid eligibility requirements. routine dental care. veterans who are eligible for Veterans Administration benefits. Other benefits waived from inclusion were payments for eyeglasses.. along with long term and home health care. The waiver of "freedom of choice" of physicians. A crucial element in the AHCCCS program is the exclusion of long term care and home health care from covered treatment.J wanted to limit its project in terms of eligibility as well as benefits. significant alterations in the normal Title XIX benefits package and administrative structure were obtained through the Section 1115 waiver process.

patients can choose any doctor they want. Under traditional Medicaid programs. Fees range from 50 cents for a doctor's visit to five dollars for nonemergency surgery. the State can limit patient contact only to previously approved physicians. nominal fees will be asked of all those who receive care. it proved to be an important decision. a waiver was issued to exempt Arizona from the normal 40 percent state funding requirement for a Title XIX program. Negotiators decided this waiver of standard retroactive coverage was needed to prevent program overload.Arizona. To facilitate the establishment of the AHCCCS program. Designed to discourage overutilization of AHCCCS services. This permits an alternative cost-sharing system with county governments. With this waiver. Given the administrative difficulties experienced during the system's start-up period. Finally. 21 TI24520358 . it was also agreed that Arizona would not be retroactively liable for medical costs incurred by patients within three months of their entry into the system. HCFA also granted a waiver to permit cost-sharing requirements for patients in the program.

we will look at life in the mine field. paramedics. it also wants to redesign health care delivery for virtually the entire population. Given these sweeping goals.'* AHCCCS Deputy Director Matthews puts it another way. "People are trying to find an answer and they're just picking their way through a mine field trying to find that answer. I've been in this 17 years now. nurse practitioners. House Majority Leader Barr notes. administration becomes an even more important component in AHCCCS than in a more traditional project. "There's no magic to health care costs. it didn't lack for ambition." The following pages will examine some of the areas where AHCCCS is being monitored. certificates of need—all designed to reduce costs and they haven't worked. The bureaucratic framework for health care in Arizona was 23 TI24520359 . surgeons1 centers. stating. the program is treading on new ground. ADMINISTRATION When Arizona finally started a Title XIX funded program in 1982. physicians' assistants. ground that is being closely watched. Not only does the state seek to provide a model of the future for indigent health care. As Jim Matthews might say.ISSUES As everyone involved with AHCCCS will state. HMO's.

That bureaucratic bulwark against creativity. Counties raised the money to care for the poor and delivered health services to them. A start-up date of October I. [Still newer regulations. Gregory Fahey. Inc." Senator Carl Kunasek says. 1 Ad hoc advisory committees to the AHCCCS staff submitted their recommendations for rules and regulations in April 1982. "The problem with other states is that they have a traditional system in place which will mean a change of old habits. Efforts to set procedures for developing procedures proceeded. the "proper form. however. The bill was passed in a special session of the Arizona legislature after Governor Babbitt had vetoed a previous version of AHCCCS earlier in the year. Henry A. enrollment. was named the new AHCCCS director.I county oriented.. reflecting legislative changes in AHCCCS. did not join the program until March 1982. On August 15. 1983. A director for AHCCCS. was set." On November 18. MCAUTO began operations in June 1982 and was responsible for systems design and data processing. Following a bidders conference and proposal evaluations. Foley. Phoenix. During the start-up time.D. marketing. establishing AHCCCS as a division of the Arizona Department of Health Services. Governor Bruce Babbitt signed into law Senate Bill 1001. however. has not been a smooth one.] Other pre-start-up work continued." had yet to be created. and Yuma. though.1981. with no preexisting bureaucracies battling over "turf. a former assistant to Governor Babbitt and now the Director of the Department of Health Services. For the state. MCAUTO Systems Group. were issued September 30. Ph. 1982. 1982. J. too soon. technical assistance and payments to providers. Some might describe it as trying for "too much. the former staff director of the Arizona State Senate." The experience of building the AHCCCS machinery. and monitoring of contracts. Staff was hired to begin the rule and regulation drafting process. this meant that it could build a new system from the ground up. Permanent rules were adopted August 30. revised rules were prepared in May. an administrator of health care plans and a wholly owned subsidiary of McDonnell Douglas Corporation.. Flagstaff. [The initial director. Don Mathis. 1983. left his post in Spring of 1983 and day-to-day administration was then handled by Mr. Following public meetings in Tucson. was selected to run AHCCCS even though it was not the lowest bidder. Mr. We didn't have to replace old approaches. October 1 rapidly approached 24 .

that normally should have taken a year and a half and did it in three months. Medical Director for the Northern Arizona Family Health Plan (an AHCCCS provider) and third generation physician in the Prescott area: "What they've done with the whole program is 25 . not all doctors knew about AHCCCS and consequently did not know how or if they should participate." Basically. Jeffrey Schwimmer. . The reactions to the program's quick start are close to unanimous: Dr. . medical director of AHCCCS's largest private provider: "This program should have started January 1 [1983]. The program's early start brought problems with the provider bidding. not October I [1982]. some smaller than others. Dr. Because of the lack of lead time. They did something . TH do my part when the time comes up.and as it grew near. conceived prematurely. "Looking back on it. so it was kind of a waste." He also believes. John Oakley states. John Oakley: "AH of this was started prematurely:" Senator Anne Lindeman: "We didn't give ourselves enough lead time to work out as many bugs . "If you weren't involved in a group or had someone who cared to become knowledgeable [about AHCCCS) you just said. . former AHCCCS medical director: "There's a consensus both within and without that the entire system was ." Allegations have flown as to why the program began before it allegedly should have. . but did not tell them where the enrollment would take place. "When they [MCAUTO] sent out enrollment letters to the categoricals [AFDC and SSI recipients] they didn't know where the enrollment sites were going to be. that the system would have collapsed by now but for the efforts of the AHCCCS doctors and care delivery systems: "The providers in this state have really gone out of their way to keep this program going. notes. the state paid for a mailing telling people they could enroll in the program. the state did a good job. ." This unfamiliarity with the bidding process is amplified by Dr. Bruce Shelton. as we could. Dr." Dr. but the fact remains that AHCCCS received a baptism of fire and is still recovering from the burns. ." The premature start brought many problems. AHCCCS apparently was not ready to handle the influx of sick indigents. Joe McNally. stating. Chuck Pyle of Pima County Legal Aid. Shelton praises the program workers.*1 Dr." but fyou) didn't bid because [you) didn't know how. however.

. And if they went out to industry and tried to market a plan with the same benefits industry was getting through an existing HMO. Ms.000 employees. making the cost of employee health insurance all the more important to them. When the bids were received. the amounts bid. Honeywell.000 in medical bills). AHCCCS sought bids from providers to serve the public and private employee sectors. Garrett. but a general uncertainty about the program was felt in other sectors as well. . It now includes approximately 1000 employers statewide representing 120." The feeling among AHCCCS staff was that the bidders were being cautious in covering potential costs. state program officers say that outreach efforts have been made to members of the coalition to get them 26 TI24520362 . McNamee reports that some smaller companies in Arizona have had to discontinue this employee benefit because it became too expensive." Lack of bidding expertise may have intimidated doctors. Early on in the program. a 10 to 18 percent surcharge was added to every bid to cover costs of administration and reinsurance (reinsurance covers providers when a patient incurs over $20. were not competitive with what's out there. . a consultant working on health care issues for the Arizona Association of Industries notes. Motorola. Their bids came in all right. In the words of AHCCCS Public Information Officer Randy Weiss. with the add-on . Indeed. The businesses involved in the coalition are primarily small in size. Conversely. The coalition has been watching AHCCCS closely from the beginning. Had bids been successful and plans instituted to cover public and private employees. "The prices came in really too high .> try to make insurance companies out of individual physicians. So they didn't go. . . they were non-competitive. . The coalition was formed by four of the state's largest manufacturers. McNamee also works with the Arizona Coalition for Cost Effective Quality Health Care. there is doubt as to what the response to them may have been. in response to rapidly rising health care costs. Elizabeth McNamee. and it was $20 higher a month. but when they added the cost for risk management and administration . "AHCCCS said to the [providers] already bidding on the public sector to submit bids on the private sector." Ms. they [would have been] setting themselves up for failure. although Honeywell has "effectively withdrawn" from active participation in the coalition allegedly due to pressure from major hospital chains who are customers of the corporation. and Sperry.

let's get together and . . One of the results of the accelerated start-up of AHCCCS was that not all providers had procured the necessary services for their individual programs. what the benefits were that they were going to offer. And that [is] the big concern. "There was such tremendous pressure to get started by a certain deadline that we awarded contracts to providers still recognizing that they maybe hadn't filled all of their . . Ms. contingencies. Because of the hurried efforts to initiate the project. though. It was the hope of the AHCCCS people to include public and private employees in the program last year. hOK. you may ' have excellent doctors that say. Weiss puts it. Ms." Some of the key subcontracts that were not finalized were with hospitals. the business community did not know enough about AHCCCS to make an involvement decision. . " . In our second year's round of bids we will aggressively go after private employers and their employees. There is a real problem with fly-bynight operations springing up. as Ms. . or what it was going to cost. Sandy Spellman of the Arizona Hospital Association relates that. . they wanted to do it too quickly and nothing was in place. it would be very attractive [to the employees].'1 An underlying concern of the coalition was the program's potential for longevity. However.involved in AHCCCS. . In terms of administration." and they're already physicians that a lot of Motorola employees are using . "We had been convinced all along that the law and the regulations required written legal contracts between these prime contractors and the provider element that was needed to comple27 TI24520363 . They wanted them to buy a pig in a poke. Doctors are not known for knowing how to run a business. . . . market to Motorola. AHCCCS providers were to furnish standard minimum services." The future of AHCCCS's inclusion of the private sector remains clouded as of this writing. "It's really important for us here at the State . in the next round to provide an opportunity for as many people as possible to come in . As stated in the original law. Then (the doctors] don't have the management behind them. . . McNamee states. . which is what a prepaid plan is." That timetable was apparently too ambitious. subcontracts with specialists. . . McNamee states businesses would like to "be assured that they've got a good plan and it's well run and it's going to be here tomorrow. They wanted employers to commit to it when they didn't really know what the administration of the plans would really look like. . Randy Weiss said in early 1983.

large volume storage. . Senator Kunasek says. . When time for the program drew near . . . Spellman reports. there was great direction coming from New York to oversee our operation here . "There were some hospitals that were reluctant to enter into a contract without some time period to actually negotiate terms and actually see what it was we were dealing with. This difficulty is eXpJored further in the "Reimbursement" portion of this study. AHCCCS insisted that before bids were awarded to providers that subcontracts with hospitals. . In the second year's bids. the main computer facility at 28 . the New York influence on this program has greatly been reduced. "We always felt the law was workable. specialists. "In the first three months of the program. As medical director he had "no staff whatsoever . however. ." All of this confusion resulted in many people and groups not being paid. . where "we |kept] track of eligibility. MCAUTO Executive Secretary. enrollment." Former MCAUTO Public Information Officer and present state employee Brian Donnelly conceded before MCAUTO's pullout that. "Some of the problems were caused by mismanagement. . . though. added her view that the program was administered from Phoenix. A couple [of hospitals] required deposits [to serve AHCCCS patients]." Sandy Spellman states. . Since June [1983]. but had not been properly operationalized by the folks who were hired to do that." Dr. no typewriter . the overall administration of the program has not been without controversy. or pharmacies be already signed. As one could expect. things of this nature. who was medical director of AHCCCS in its early stages. then we [used] . and claims processing . IPA [the largest private provider] was convinced that they did not need subcontractors. they were officially informed by the state that they had to have subcontractors." By then. We are running the show here ourselves. this episode was not repeated. . Schwimmer." Toni Neptune. stating that most of the program was run from New York by MCAUTO. ./ ment the services that the prime couldn't provide . They were honest decisions based on no prior experience. This should eliminate some of the confusion experienced in the first year. Prominent among these were hospitals. I had a desk and a phone and shared a secretary with five others. . Ms. feels that the problem was one of insufficient and poorly located staff. there was not much time to negotiate for services. . For major computer processing.

the watchdogs that are watching the watchdogs. Among the differences are $20 million. allegedly because it was asked to perform services not in its original contract. You've got county administration. the state Department of Health Services (DHS) has been responsible for both the eligibility and enrollment processes. Dr. in that the Director of the DHS has the authority to contract out some portions of the program's administrative duties to private entities. charges that MCAUTO has been overpaid and owes the state money. The state. private administrator. "In fact. You can't send in one form stating someone's been hospitalized from this date to that date. and a host of "irreconcilable differences" between the two parties. . the adminstrator's administration.5 million. So is the matter of how the changes will affect the performance of the program. MCAUTO agreed to administer AHCCCS for 40 months (including a four-month start-up period) for approximately $11. in turn. we had spent the three-year budget thefirstyear. alleged unauthorized payments by state officers to MCAUTO. amendments were required to permit the state to assume MCAUTO's duties. .1984. the plan's administration." The MCAUTO/AHCCCS split greatly changes the administration of the program. Because the original AHCCCS legislation stipulated that the program have an outside. yet vital. Louis. MCAUTO left AHCCCS claiming that the state owes it money for services rendered. MCAUTO said it would need an additional $24 million to complete the three-year project. service of AHCCCS administration is the "hotline" that hospitals and doctors call to determine 29 TI24520365 . Every day you have to send in a new form . every day your patient's in the hospital you've got tofillout a separate form. Given the potential for litigation in this situation. this prerogative will undoubtedly be exercised.McDonnell Douglas in St. Joe McNally feels that. there is quite enough bureaucracy in AHCCCS: "For instance. At issue are alleged verbal contracts between MCAUTO and a former AHCCCS director. the legislative oversights." Before leaving AHCCCS. according to Randy Weiss. overall. The AHCCCS amendments also provide the DHS with the power to hire its own legal counsel. Since March 16. the state administration. How the AHCCCS/MCAUTO dispute will be reconciled is an open question. The new legislation provides "a bit of leeway" to the state. How many lawyers is that? You'll never find out because it'll never be in one place. Brian Donnelly noted." One relatively minor.

AHCCCS "is being monitored the way other Medicaid programs are monitored by HCFA.R. institutional reimbursement requirements. utilization control requirements. The evaluation will attempt to determine how the AHCCCS model could be applied by other states and will measure the overall success or merits of the demonstration aspects of the program." The standard HCFA review covers eleven subject areas: abortion. the Research Triangle Institute of Chapel Hill. there will be an annual state assessment of the Arizona system by the San Francisco regional office. Shelton states. claims processing. North Carolina. John Oakley describes attempts to verify a patient's status over the hotline as "like calling the I. utilization. California. The team includes the Institute of Health Policy Studies of the University of California at San Francisco. The state legislature has asked for a special evaluation of the program. usually during emergency situations.S. Unfortunately. and family planning. the hotline is not always accessible. eligibility of patients who present themselves for treatment. financial management.. Virginia. administrative procedure. Both the main office in Maryland and the regional office in San Francisco are involved. Dr. "The hotline is constantly busy." Official monitoring of the AHCCCS program has begun and will continue throughout the three-year demonstration period. According to Sidney Trieger at the Office of Research Demonstration and Statistics. administration and management. coverage. the Actuarial Research Corporation of Falls Church. and non-institutional reimbursement will not be major parts of the AHCCCS review. claims processing. prepaid health requirements. That is. utilization. reimbursement. and other areas. A special. institutional reimbursement requirements. non-institutional reimbursements. Since AHCCCS is not a fee-for-service program." Dr. and third party liability. sterilization. which is not included in AHCCCS coverage. a 39-month contract was awarded to an evaluation team led by Stanford Research Institute International of Menlo Park. At the federal level. the Health Care Financing Administration (HCFA) has been watching the program since its inception. and several independent consultants. 1983. eligibility. independent evaluation has also been ordered by HCFA due to the special nature of AHCCCS. 30 . The same is true of family planning. The subjects monitored are to include quality of care. On June 30. on April 14th.

one must first understand the process itself. one must earn less than $2500 or $3200 a year. This system is so complicated that even the doctors have trouble understanding it.) In no instance 31 TI24520367 . This is no simple task. AHCCCS is asking the state to increase its second year $180 million budget by $40 million to $65 million. respectively. Dr. the largest private AHCCCS provider. subcontractors are not paid by the providers. As mentioned earlier in this report. To understand the problems of the enrollment process. Providers are not paid by the state. Eligibility also may be established if a person is declared "indigent" or "medically needy" by the county. The first step anyone takes to become an AHCCCS patient is to apply for program eligibility with the county government. He is a "categorically eligible" who is automatically qualified to participate and needs only to be enrolled with the administrator. Bruce Shelton. only the income earned in the 30 days prior to application is considered. we will begin at the beginning. "Someone needs to go on television and explain it to the public. If someone receives federal funds from either the Supplemental Security Income program of Social Security or the Aid to Families with Dependent Children program. Unless people are declared officially enrolled in the program and officially listed by the administrator to be so enrolled. But we are getting ahead of ourselves. nothing in the system works. and health care service breaks down. This takes time." Like Alice in Wonderland. with the ceiling rising an additional 17 percent for each dependent. Knowledge of the workings of AHCCCS is still limited even after months and months of operation. (A 90-day review period was struck down as being discriminatory against the recently unemployed. Because of unanticipated patient expenses caused by enrollment problems. Medical Director of the Arizona family Physicians Independent Physicians Association. he may skip this requirement. In both categories. the earnings limitation increases by one-third if the applicant is married.ELIGIBILITY AND ENROLLMENT Of any problem experienced in AHCCCS. pleaded in 1983. And the breakdowns are expensive. For computation purposes. none has caused a bigger headache than the enrollment of indigent patients. to be legally indigent or medically needy.

applicants are interviewed by an eligibility worker. "Our clients have had problems getting documentation. if no documentation can be produced. Upon completion of a nine-page form. they will say they have no income at all. Pyle contends that AHCCCS requires too much verification. He cites a recent case where a woman declared as income a fruit basket given to her by her church. Some counties in Arizona have broader standards for eligibility. pregnant girls who cannot produce official identification such as a driver's license or Social Security card because they simply don't have it yet. motorcycles. This includes everything from savings to real property to cars. He labels the eligibility process a "serious bottleneck. Pyle says many are young." adding. To admit to any income is self32 . In fairness to AHCCCS. Ultimately. A typical case would be a pregnant girl in her last trimester who cannot get care due to documentation problems. county-based system as well. and boats. a second meeting must be scheduled. rather than say they are receiving less money than they really are. documentation is a major obstacle to the program." Mr. For some applicants. If a person cannot produce physical verification of income at the time of the interview. The woman's eligibility application was delayed over a $20 fruit basket.) may an applicant have net resources of more than $30. as is permitted under the law. the eligibility worker describes the circumstances of the case on the application and the potential AHCCCS patient signs a "Statement of Truth" attesting to the veracity of the declarations made on the form. The time elapsed between interviews depends a good deal on how long it takes a person to document the income or assets in question. The county eligibility worker required an affidavit from the church as to the value of the basket. Pyle feels strongly that the process could be more flexible. When the woman went to her priest with the request. Documentation for all income and asset declarations is required. no one at the church was really sure who should write the letter. these same problems apparently existed under the old.000. One court case against Pima County concerned a woman who was eight months pregnant and could not get care because notarized statements were required to show she earned $12 a week babysitting and that she lived rentfree with her brother. Those who believe they fall into one of these two categories apply to their local county office. Chuck Pyle represents indigents who seek entrance to AHCCCS and reports that difficulties exist. He feels that if someone is going to lie to become eligible.

incriminating, he adds, and therefore an indication of trustworthiness. Pyle suggests not doing away with the documentation requirement, but perhaps instituting random enforcement to facilitate quicker access to care. Assuming income and assets are verified and eligibility is declared, the applicant receives a letter of approval from the county. Prior to March 16, 1984, the indigent or medically needy person would then take the eligibility notice to the administrator, . MCAUTO, for enrollment. MCAUTO would enter the person's name in their computer system and issue an AHCCCS indentification card. This card would be the patient's entry into the health care system. Today, the state Department of Health Services, with the assistance of the Department of Economic Security's computers, is assuming this responsibility. Before enrollment is complete and a card is printed, the applicant must select a provider. In most counties, there are at least two AHCCCS-contracted providers from which to choose. Program officials report that for some individuals who are used to "just going to the county/* this choice is not easy. For those who do not select a provider, an assignment is made by the administrator. This is necessary to keep the program functional. AHCCCS's Randy Weiss points out, "Obviously, in a prepaid program, everything is in limbo until (enrollees] are matched with a provider, the provider is paid for them, and they are on record." The indecisive are sent to the provider who submitted the lowest cost bid in the county. Ms. Weiss states, 'At any given time what we do is take the backlog of people who have enrolled, but haven't chosen yet, send them out a mailing saying that in two weeks or whatever period of time, if we haven't heard from you we will assign you." According to Dr. Shelton, the Arizona Family Physicians IPA was low bidder in about 80 percent of the categories around the state in the first year and, thus, received the bulk of assigned patients. Since the provider's income is based on the number of enrollees in its program, those providers who were not low bidders are not happy with the way non-electing indigents are assigned. No changes in the system have been made however. AHCCCS members are to be screened every six months to see if they still meet eligibility standards. In-person interviews and documentation of any changed circumstances are required. Redetermination of AFDC and SSI recipients is done by the State Department of Economic Security and the Social Security Administration,


respectively. Arizona completed its first redetermination period in the late summer of 1983. The counties sent out letters to AHCCCS enrollees asking them to come to their local county office to reapply for eligibility certification. Those who did not come in were dropped from the program. This recertification process may be a factor in the decline in AHCCCS enrollment from 160,000 in mid-1983 to 150,000 in November 1983. AHCCCS also completed its first open enrollment session in late August and early September of 1983. In efforts to lure new enrollees, providers engaged in media advertising campaigns. Some hired recruiters to attract enrollees from other plans. When indigent members of the program were given this chance to change providers, 23 percent did so. Of that number, a little under half changed involuntarily because their provider lost its bid to serve them in the second year of AHCCCS. That provider was the system's largest, Maricopa County. Maricopa, which includes the metropolitan Phoenix area, had a $27 million provider contract with AHCCCS in thefirstyear. In the second year, the county was outbid for the medically indigent patients by two private providers. There has been speculation that some providers submit artificially low bids in hopes of being assigned the no-preference enrollees. Because these enrollees are assumed to be healthier than those who are anxious to choose a provider, they are supposed to be a profitable group to have as patients. With the $27 million loss of revenue, Maricopa has had to make cutbacks at the county medical center, which is the state's largest facility treating indigents, and close two local clinics. The county is doubly upset because, like other counties, it still must pay for long term and home health care, two of the most expensive components in normal Medicaid programs, and it still must treat those patients who are over the income levels for AHCCCS's eligibility. Those people, known as the "notch"" group, are a subject of controversy between the state and counties. With counties legally responsible for treating patients who are too poor to pay for medical expenses, but not poor enough to qualify for AHCCCS, friction is developing over eligibility limits. Maricopa estimates that there are 80,000 people in this "notch" group in its county alone. That, basically, is the eligibility/enrollment process. The experience of putting this plan into practice has not been uneventful. In the Spring of 1983, opinions varied:

Dr. Bruce Shelton: "Eighty-five percent of the people we're presently caring for are enrolled, are eligible, and everyone knows it. As far as that sector of the program, it's going very well. . . People are happy." Dr. Jeffrey Schwimmer: "Basically, the thing was an absolute ball of yam that the cat got into." Senator Anne Lindeman: 4*lfs been a rocky road so far: not necessarily because of the program itself, but because we started out in a big rush.'* Some of the first rocks in the enrollment road were the temporary eligibility cards issued by the counties. Discontinued as of February 1, 1983, these cards caused quite a few problems forAHCCCS. When the system began, naturally, there was a great influx of people into the program. To help ease the logjam, the administrator, MCAUTO, decided to issue cards to those people who sought entrance to AHCCCS but had not completed their eligibility determination. Dr. Shelton explains, "In the beginning, MCAUTO took it upon themselves to say, 'that process is hung up so we're going to go to step two [enrollment],*' and they issued a lot of people documents that showed they applied for the program before going through eligibility . . . They figured they'd save time." What they did, though, was complicate matters. A number of the people who received the temporary cards thought they were entitled to care. Dr. Shelton states, *\ . . a lot of people took those documents and never went back to do the step one eligibility . . . [they] went out and received care from a lot of providers/' Senator Carl Kunasek continues, ". , . the providers did not read the fine print on the card. They accepted the card as from a person who had already been enrolled when, in fact, it stated [only that) an application for eligibility had been made . . . They should have given no cards at all." The result was that a lot of providers ended up treating ineligible patients and could not be reimbursed for the treatment. Reimbursement, while directly tied to enrollment, is discussed separately later in the study. While there were problems in getting people enrolled in the program, those who did make it through were disproportionately in need of treatment. Dr. Schwimmer explains. "The first people . . . in a program like this are the high utilizers—the sick people. The healthy people don't come out unless they need medical care." 35

. we used up a whole year's worth (of pregnancies] for 50. "We had people walking in off the street who had just had cancer operations. and other providers rendered care to indigents and. if a medical specialist under contract to treat patients referred by the provider gives care to those patients. We have one doctor who got 30 in one week. If a doctor who is part of the system treats someone who he believes is enrolled for health care and it subsequently develops that that person is not enrolled. The tables did not begin to prepare them for the deluge of cases. The amount of money that a provider receives depends on the number of people officially enrolled in the health care plan. hospitals. experienced difficulties in this area. a corresponding diminution in the accessibility of care. not the 36 TI24520372 . they were the "high consumers of health care dollars. I'd say we had 400 deliveries in the month of October [1982] and we only had 4000 patients at that point in time. must reimburse its subcontractors for care given to one of the providers patients." Dr. Doctors. That's the average. pharmacies. It almost seemed in the beginning that the county system had allowed its sickest people loose to go elsewhere. REIMBURSEMENT Reimbursement of expenses to health care providers in a prepaid. It didn't make any sense. Under AHCCCS. in turn.'1 In Dr. Shelton concludes. Dr. capitated system is directly tied to enrollment. allegedly.** To put it mildly. "People just wanted to get out of where they were. . AHCCCS. Reimbursement becomes a vital point of contention. that specialist must be reimbursed by the provider. . Dr. . in its first year of operation. Shelton began to wonder. adding. For example. A lot of people escaped on their own/* The phenomenon happened to many providers. We later found out that it just happened that way . The provider. "We're set up to handle 23 pregnancies per 1000 people per year. Shelton provides an example.000 people in one month.} AHCCCS providers made their bids to the state based on actuarial tables showing what they should expect in the way of patient load. The result was tremendous financial strain on a great many people and. the state must give money to the provider for each enrolled member in the provider's plan. Schwimmer's words. this high consumer utilization was not expected. someone has to absorb the bad debt incurred for the patient's treatment. no one was willing to shoulder responsibility for the cost of the treatment. in many instances.

is reimburseable by the state. "." Hospitals have been a vocal force in the reimbursement controversy." so to speak. literally. Shelton noted. but (also) with prime contractors. Dr. Generally. Spellman says that these subcontracts typically specify repayment to hospitals within 15 or 30 days of submission of the bills. but I have trouble understanding them. • . whose provider group claimed it had more enrollees than the administrator. Ms." In the meantime those people needed care and someone had to pay for it. The problem has been tardy payments to the providers and subcontractors. as settlement of these suits." The result was legal action. she says. stated in the Spring of 1983." Dr. "It's troublesome because there are people out there who look to us as the ones who should be paying the bill and legitimately we can't until we've been given the money [by the state]. Sandy Spellman of the Arizona Hospital Association states." For all hospitals. to get your entry into the health care system." The "prime contractors" are the AHCCCS providers who subcontract with hospitals to provide inpatient and outpatient care for their members. A number of hospitals began the process of contract termination due to alleged breach. MCAUTO. The guidelines kept changing day to day." There are legitimate reasons for these cases. nobody can find the answers to those problems. VfcIn the beginning. Dr. hospitals agreed to serve AHCCCS 37 TI24520373 . Part of the reimbursement problem rests with the eligibility/ enrollment situation. there were constantly shifting guidelines about what was a legitimate 'ticket. "unfortunately. "Some patients who enrolled five months ago are still in 'pending status. stating. Bruce Shelton. Jeffrey Schwimmer says uncertainty over liability for medical expenses is rooted in the original lack of a firm set of regulations for settling patient eligiblity. John Oakley remarked about the responsibility for reimbursement. there are two sources of AHCCCS reimbursement for hospitals: emergency care rendered to individuals who are potentially eligible for the program and are later determined eligible within a limited number of days. but that. "Our problem is not only with the state turning around emergency care reimbursement. Eventually. a number of prime contractors were getting 60 and 90 days behind on making payments. would recognize." As Dr. and care provided to AHCCCS members is reimburseable by the main provider who contracts with the state. "A number of hospitals are certainly having financial problems.state.

The AHCCCS system will reimburse providers for costs of treating eligible-but-not-enrolled patients during the interim period between their declaration of eligibility by the county and their enrollment with an AHCCCS provider. however New changes in the AHCCCS law are aimed at the cash flow problem. non-contractors will receive 80 percent. The amount of reimbursement will depend on whether the hospital is an AHCCCS contractor or subcontractor Hospitals that are AHCCCS contractors or subcontractors will receive 95 percent of their charges. Expenses accrued prior to this five-day limit are charged to the county that is responsible for declaring eligibility. there are still those providers who are simply not having their claims approved. "While hospitals were criticized at the time for requiring some up-front payment. the way things played out over the ensuing months rather proved that the hospitals who had been that cautious were the only ones getting paid." according to Ms. including those of hospitals. 1983." Amendments to the AHCCCS law passed at the close of the 1983 legislative session may have obviated these problems. After September 30. The provider with whom he enrolls will be liable for expenses incurred after the date of enrollment. billings would be turned around on a more expeditious basis. "to demonstrate good faith that. if a person who has been determined eligible for AHCCCS by a county. 38 ./ patients if the prime contractors made a "deposit or some sort of prospective payment. The reimbursement in this instance will be on a capped fee-for-service basis. When a hospital treats an indigent or medically needy person from the county. are resolved within 45 days of submission to the administrator. but has not yet enrolled with a provider. in fact." She adds that. receives emergency services he will be enrolled "on a priority basis" (i. The latter cases involve treatment given to people who received care and were later declared not eligible for AHCCCS. While these changes address the late reimbursement problem. Under recently passed amendments. AHCCCS will be retroactively liable for emergency care provided within five days prior to the date that eligibility is determined. It is because this fee-for-service reimbursement has been unexpectedly expensive that AHCCCS has had to seek supplemental appropriations for its second year's budget.e. Spellman. the administrator must establish and maintain a claims resolution procedure to insure that claims submitted for reimbursement. within days).

the people who were given temporary cards. Any profits from this fund go to the providers. how is that money allocated? Dr. pharmacy. This covers patients who have extraordinarily costly illnesses. \2lA percent to the business manager. Then they started to refuse to see the patients. "We get [about] $75 per month per patient. Dr. but were not eligible] until they realized they were going to get burned financially. and one-third goes to the Arizona Family Physicians IPA [the provider] itself to pay staff. • Hospital Care Fund—40% of the pool. • Primary Care Fund—35 % of the pool. and any other subcontractors. • Statewide Risk Fund—10% of the pool. Bruce Shelton." 39 . resulted in a lack of care. Medical Director of AHCCCS's largest private provider. some say. This pool of money breaks down into four groups: • Administrative Fund—15% of the pool. It pays their expenses. Schwimmer states. one-third goes to the claims processor who gets the checks out. and 25 percent to the charitable foundation established under Internal Revenue Code 501(c)(3). One-third of this fund goes to the business manager who made the bid [to the state] and advises us. Where Does the Money Go? When the state pays a health care provider its monthly capitated rate. This IPA [Independent Physicians Association] is a non-profit group [application for Internal Revenue Code 501(c)(3) status pending] and any profits we make will be used for a worthy cause. lab costs.A good deal of this problem was caused by the temporary documents issued earlier in the program to people who had not established eligibility (see "Enrollment and Eligibility"). "Most of the doctors saw them [i. No one can walk away with the money. gives a breakdown of how his organization uses the money. This belongs to primary care doctors. This includes costs for ambulances and any hospitalrelated care. The lack of reimbursement for treatment provided to these people.e. One-half of the profits from the Statewide Risk and Hospital Care Funds go to the primary care doctors.

As mentioned. Because of the disagreement on terms in this instance. "Counties are still responsible if no one else will pay. The aim of the state now appears to be to speed up enrollment and verification procedures so that debts for unreimburseable treatment are not knowingly incurred in the first place. The case demonstrates the clear need for specific contracts where all parties understand their rights and responsibilities before any liabilities are incurred. some providers neglected to obtain contracts with hospitals. It's the same situation as before. or others until there was precious little time to reach agreement before the October I. rejected them as being too high." Who picks up the tab when unauthorized care is given? Dr. as it is for every new concept that is put into practice. 1982. responsibilities had not been firmly set as to treatment costs and their reimbursement. As a result. the administrator. Dr. but there are a lot of people out there that have learned that there is confusion in this system and have learned ways to get care knowing that they're not eligible. Oakley states. start-up date. "I don't know if I should use the word 'fraud" or not. specialists. A local pharmacy served AHCCCS patients for five months on the basis of an oral agreement. this experience has produced legislative changes in the program. "I think a lot of people thought they were going to collect very readily before the state had the opportunity to certify that these people were eligible. Shelton states. reduce the unresolved claims plaguing AHCCCS. In spite of the law's requirements. When the pharmacy submitted its charges.i ) Then the pharmacies started balking because they weren't getting reimbursed. This would fix reimbursement liability at an early stage in the patient's care and." A previously discussed problem contributed to this reimbursement confusion: the failure to negotiate clear and binding contracts between providers and subcontractors. For instance. It was just terrible. nursing homes in the area were nearly shut down as the pharmacy reluctantly threatened to withhold delivery of medication in order to force reimbursement from AHCCCS. hopefully. in Yavapai County." Randy Weiss of AHCCCS says. in turn. MCAUTO. 40 • i TI24520376 . terminated its oral agreement and found another pharmacy to provide medication to the patients." Experience is certainly a teacher for AHCCCS. The program. no contracts were ever signed to provide medication to certain patients. Confusion in AHCCCS may have also introduced an element into the reimbursement problem that is all too familiar to other programs.

That's what this program is about. which strikes at the core of AHCCCS. The feeling of many in the medical community is that prepaid. but that long term costs will mount and eventually fall due. Since doctors' profit margins depend on how much or how little they spend on their patients. believe the program will save money. In my opinion. capitated plans will indeed save money in the short term. Joe McNaily. like Matthews." As Jim Matthews states. It has nothing to do with the quality of medicine. These costs are what worry them. as Chuck Pyle notes. doctors will use less expensive. "take the money and run. We did not envision a program that would keep people from getting sick. in effect. in practice." Whether AHCCCS is concentrating on preventive medicine would depend. That keeps him out of the system. they claim. There are no restrictions on how to practice medicine. "This is a fiscal answer to the problem. The fear of some critics is that. medical director of an AHCCCS provider group. The approach will save money now. "We wanted to get sick people well." This concept of AHCCCS *s purpose is not shared by Senator Carl Kunasek. the fear is that they will. on the individual provider. That way you save money because you only provide the care when they're sick. capitated system is that patients will not receive quality medical treatment.QUALITY OF CARE One of the great worries in a prepaid. a strong supporter of the program. but not at the expense of patients. and still make a profit. Jim Matthews describes it as a "philosophical competition" between two approaches to medical care. there is "not a whole lot of feedback on quality of care." While official audits are not available at this time. That's the test we're conducting here. Matthews. . Right now. treat patients. . "The great way to save money in this program would be to enroll everybody and then not provide care/' AHCCCS supporters." appraises Dr. The other school of thought is (that) you keep him well and you don't have to treat him. but it will lead to more aggravated 41 . It is up to the the provider to utilize allotted money. including Mr. "One model is (that] a person walks in and he's sick and you fix him . in order to save money. "second best" treatments that could lead to more serious medical consequences down the road. the thoughts of those directly involved with the program may shed some light on this issue. that is beyond the scope of government. Senator Kunasek says that in designing AHCCCS.

"Doctors took an oath to provide the best care they can provide and none of them are running around on bicycles in tattered shirts." He continues. if there is an unscrupulous doctor? Will he be identified? How? AHCCCS is designed to monitor itself for quality of care. some health providers contend. so they already have private practices out there. "If I don't do what I have to do. the doctor is more concerned about the economy of the patient. . Senator Kunasek. They just aren't going to get paid as much for it. I'm dumb. it's a hollow argument. As we hone the system down. it's actually going to work. states. "Most of the physicians participating [in AHCCCS] are participating through independent practitioner associations." The quality of care argument appears to stir little concern among Arizona legislators. public and private. Dr. In the real world. Underutilization could be more costly than overutilization. "In my opinion. These worsened conditions could end up costing much more than the early "best medicine" approach. but Dr. a registered nurse. There is nothing in this program that says they can't deliver quality medicine. himself a pharmacist. either they voluntarily leave. that's all. We have about five percent of the doctors in the system who don't understand it. I don't believe it's in their frame of thought to suddenly cut back just because two percent of their caseload [are under the capitated plan]. they're going to be just as concerned about quality under this program." What happens though. In the private setting where there is no [health] insurance. 42 TI24520378 . When they get their reports and see the disasters they've created.) conditions in the future. Bruce Shelton acknowledges this argument. or we actually ask them to leave. These indigents are just a new caseload for them." Representative Burton Barr comments." Senator Anne Lindeman. says. because unless the patient dies it's going to cost more to treat [him] tomorrow . the quality is there in all cases. stating. "Prepaid medicine is really better medicine for the patient if you're dealing with doctors who really understand prepaid medicine. There may be patients who could have had their problems "nipped in the bud" by more thorough and more expensive initial treatments. "The only thing I can say without getting too cynical is that if they [doctors] are that concerned about quality. ." Randy Weiss notes in this regard. but that patient gets just as good care. we educate them. I've got to figure out what's wrong with [the patient] today.

Oakley stated in 1983. However." Randy Weiss stresses that ". Toni Neptune of MCAUTO said that under that company's administration." The program did not have a full time medical director again until Dr. He states. . planned monitoring projects will attempt to evaluate the program. The part-time medical directors also investigated patients' complaints. 1982. ." This quality control consisted of visits to providers* offices and examination of medical records. the emphasis is on establishing 43 . Donnelly believes. As discussed in the "Administration" section. . "There are people who were lost for years and are now getting better care than they ever were." Jim Matthews of AHCCCS states that the program's medical director is supposed to audit providers to make sure quality care is given. . 1983. Shelton feels that the program's structure lends itself to a higher quality care for the patient. and now remarks that. that 99 percent of people's unhappiness with the program is due to administrative problems with eligibility rather than quality of care. Don Schaller assumed responsibility for the job in February 1984. . however. Brian Donnelly of MCAUTO stated that. Two California doctors filled the position on a part-time basis during the year between Drs. The gatekeeper approach gives them one doctor to deal with. providing a more independent verification of the quality of care rendered. just talked about . All this stuff was simply on paper. The feeling of you relating to your doctor is not there in other public health care plans. Schwimmer and Schaller. quality of treatment was monitored through "provider management" on a case by case basis. "The quality of care system should have been on line (when the program began]. Dr. All of the quality control that's carried on is overseen by our acting medical directors. it did not fill the director's slot until Dr. "One of the functions of the administrator is to oversee the quality of care provided by the plans that are AHCCCS . He resigned on January 31. While AHCCCS began official operation on October 1. 1982. If people don't have that feeling they may perceive the quality of care as being low when in fact maybe it isn't. the position of medical director has been vacant for most of the program's existence. . They [AHCCCS] have no evidence that they have been concerned about quality except verbal evidence. Schwimmer was hired on December 7. "None of the quality care controls have been implemented.

. . If you can't afford to go to the doctor. written by Meir Statman and published by the American Enterprise Institute. The Declining Profitability of Drug Innovation. There are other implications in the cost/quality issue to consider. There was hardly anything ever mentioned about the quality of care or the accessibility of care.** 44 . have been the result of tremendous financial investments in research and development by private industry. four kinds of tranquilizers . A recent study. if you can't afford medical care. however. "The bottom line was (that] the accessibility of care was worse than terrible ." of which Dr." Of course. One long term consideration is the effect that extremely low prices for medical products could have on future innovations in the medical field. but in a different vein. impersonal system." Representative Ban* is concerned with accessibility too. . The report states. prosthetics. there is a trade-off between low prices of drugs to consumers and incentives for innovation of drugs . "The system has to be affordable. 1 had one lady walk in with 18 bottles that she wanted refilled: three kinds of blood pressure pills. it just happens every day. . Schwimmer says of his experience with the program. some of which are already heavily regulated by the government. . Competition in the Pharmaceutical Industry. Dr. Shelton speaks. By having one doctor who knows a patient's medical history. Dr.i that primary care relationship. What happened was that each time she went in she saw a different doctor who gave her a different medicine not knowing that she already had another . the patient must first be able to see the doctor. "People who come from that type of program classically walk into your office with a shopping bag full of medicine. . in order to receive quality care. discusses this point. It's not maliciovts. . . noting. Thus. The gatekeeper approach will diminish this considerably. it seems possible that the attempt to save money for consumers through lower prices of drugs might result in further reduction of incentives to innovate drugs. . . and pharmaceuticals. . who cares about quality?" It's his belief that AHCCCS will lower all health care costs and thus improve the overall quality of medical care in the state if only by making it available to more people. it is believed that the quality of care for the patient will be better than that from a clinic-oriented. could mean less money available for research projects resulting in fewer technological advancements in the future. Shelton comments. Advancements in lifesaving machinery. The whole thing was money-money-money-money-money. *\ . Sharp reductions in income for companies in these fields. to name a few.

D. then. but on therapeutic and administrative concerns. of the Department of Pharmacy Health Care Administration at the University of Florida. . the closed formulary issue may affect the quality of treatment a patient may receive. however. meaning that doctors are limited by the state in the types of drugs they may prescribe to Medicaid patients. though. If all goes according to plan. He concluded that *\ .. the primary weaknesses in the formulary. Indeed. Studies have revealed. McCormick. however. this one performed by William C. Individual providers. . If people generally view the system as rendering inferior treatment. AHCCCS does not have a statewide formulary which doctors must follow. raises another point in the cost/quality debate: the effect of restrictive drug formularies on patients' health. there could be distrust of a system where patients know that their medical care will 45 . Ph." Depending on the restrictions placed on prescription medicines by individual providers. . He also noted that there did "not appear to be a mechanism by which physicians can obtain prior approval for the coverage of nonformulary drugs which they consider necessary for the treatment of specific patients. they eventually will be able to include AHCCCS among their choices for health insurance coverage.Another study. Public perception of the quality of care provided by AHCCCS will be a significant factor in its acceptance by the general population. The rationale for restricting prescriptions in this way is that such limitations would reduce program costs by permitting only inexpensive medications to be used. that program costs actually increase with closed formularies due to the increased bureaucratic costs involved with the prescription approval process and the exacerbated conditions and increased cases of disease associated with the unavailability of drugs that had been removed from the formulary. Dr. A formulary is a list of approved pharmaceutical products from which a doctor participating in a health care plan may prescribe medications. relate to the exclusion of significant pharmacologic products/' He cited the exclusion of one drug that is on the World Health Organization's essential drug list and another which he terms the "drug of choice'* for certain conditions. Some states have enacted restrictive or "closed" formularies for their Medicaid programs. must contract for pharmaceutical services and it is here where restrictive formularies may be employed. AHCCCS will find it difficult to compete with established private health insurance plans. McCormick analyzed one such drug formulary not on its economic impact.

Thus. Joe McNally states. " . then. . though. as the system gets older." She continues. . the more you're going to get paid. Chuck Pyle believes that. if they could talk more about it as the 'Arizona experiment' or the Arizona alternative' or the 'Arizona competitive system' rather than the 'indigent program. there will be perceptions on quality of care depending on the provider." Ultimately. " .. the concern [of business] was one of image . . cost their doctor money. that their employees would perceive that their employers were trying to foist on them a lower class of medicine. "Prepayment connotes that the less service you provide as a provider. It must work to remove the doubts of some that their doctor could be skimping on care to make a buck.* That hurt. "We expressed that concern to the AHCCCS people very early on . ." AHCCCS. but also keep in mind the public relations factors involved in "selling" the program." 46 T124520382 . . must not only strive to provide quality care to its patients. As Dr. word-of-mouth may decide the issue. it should not have been publicized as an "indigent" program because many people equate such programs with inferior treatment. . image is very important* Elizabeth McNamee feels that to have made AHCCCS more attractive to the private sector.

" Senator Kunasek concurs. were hoping it would fail. on the. thus far. They.REACTION TO AHCCCS It's premature to make final judgments on AHCCCS." says Jim Matthews. In my opinion. AHCCCS evokes responses. 47 TI24520383 . "This program was not hilariously accepted by the medical profession. It would be the reverse. "Basic opposition to AHCCCS has never been expressed (by ArMAJ. Whatever the reasoning or motivation involved. citing philosophical differences with the basic structure of AHCCCS or political interests as bases for positive or negative comments about the system. in their own quiet way. "Everyone welcomed this as a possible way to solve the problems." Individuals and groups have formed opinions. We want to be flexible enough to be supportive. Some members have. stated in 1983. They don't like any program that absolutely takes away freedom of choice. however." Dr. "It hasn't had enough time to develop all the problems its going to have. there is still a certain segment of the medical community who oppose the program. past president of the Arizona Medical Association." He does point out that parts of the program are unacceptable to ArMA. however. stating. Representative Barr claims. but not this group. John Oakley. however. that. Some people feel these opinions were formed before the program began. "We did not receive the cooperation of the medical community in developing the program. In the words of Representative Ban. Some legislators disagree on the universalness of its acceptance. limited experience of the program.

brought renewed reason for optimism. That's why they [hospitals) don't like the program. Clearly. We have had more concensus (among doctors] in Prescott on this program than on any item in 20 years. as problems arose." Dr." Times and attitudes changed." He went on to state that in his area. Yavapai County. Oakley feels that AHCCCS is "not working to provide quality of care and it's not working on cost containment. the Arizona Hospital Association. . Businesses in Arizona. . and a time when they will closely watch the effects of AHCCCS on their operations. that could be the difference between reducing costs and not." In October 1983. . there is a little concern for the hospital community because we are talking about cutting utilization. "Two tenets we are opposed to: lack of freedom of choice and inclusion of the private sector. . Spellman says. are looking at it as a possible way to hold 48 . that ". but also put a very positive emphasis into getting hospitals to participate in the program. been proceeding as we had envisioned. This capitates hospitals in the treatment of Medicare patients. says Sandy Spellman. You can get a lot of acclamations otherwise from the people who are running the program. We worked to get the program implemented." Thus. We not only supported the legislation. "If you only have to be in [a hospital) two days for an appendectomy instead of three." Legislative amendments and new personnel appointments." Representative Barr states. . however. . Shelton already claims. "Hospital use is down . "was the only organized provider that supported the legislation. but the burden of proof that it is working should be on them. AHCCCS aims to reduce hospitals' income by making them less busy. When AHCCCS was proposed. "We have sort of gone through phases . hospitals treating Medicare patients also faced restrictions via the "DRG" (diagnosis related groupings) program. both with the state and the hospitals . where reimbursement rates are set by the federal government. "people are getting cared for in spite of the program. We are not opposed to prepaid care. Dr. Since the implementation. Randy Weiss of AHCCCS notes. . hospitals have been somewhat concerned because the program has not. .. ." Hospitals took a different stance at the beginning of the demonstration project. . though. We are doing it outside the AHCCCS law . it is a period of adjustment for Arizona s healing centers. while not yet able to participate in the demonstration program. as operationalized. just prepaid care that includes those aspects. There have been major problems in reimbursement.

." Business is hesitant to jump in with both feet. Ms. . I believe there's going to have to be a redesigned package for health care to the medically needy and indigent for us to survive it . .down the increasing expense of employee health insurance. "They want to see the hard facts before they make any commitments. . Medicaid]. McNamee adds.e. . . . the development of more competitive alternative plans for individuals." Neither can many states. States no longer have the money." While business in Arizona is cautious about AHCCCS. but they tied themselves to a contract with the federal government [i. is a nightmare. Businesses would have to take [their employees] back into their own plans. Representative Barr sums up the problem: "Health care costs are rising at 16 to 18 percent a year. Elizabeth McNamee of the business coalition working for lower health care costs in Arizona says of her group. McNamee explains that companies basically want to make sure that the program will be more than just a temporary experiment. administratively. Randy Weiss states. concept because they believe that what it stands for is improved competition . "We can't wait five to ten years for relief. . . They're broke. This is impacting on all the states. "Philosophically. though. AHCCCS they have been supportive of the ." Ms. Can we come out of [AHCCCS] with new techniques?" 49 . There would be [provider] groups . . . . from the beginning of. They've heard of other companies where they had to move employees back into [the company] plan and that. "The big concern is that they would get all of these plans [AHCCCS provider plans] springing up with the idea that industry was going to enroll their employees . who had no financial management behind them and they'd go out of business in six months.

that's what many would consider to be the alternative. But. in Arizona. ." Senator Lindeman. "It's like a parachutist who pulls the ripcord. if AHCCCS becomes not the basis for future plans. Senator Kunasek counters. then we're stuck with the Medicaid program because we have to do something." says Sidney Trieger of the federal Health Care Financing Administration. but a forgotten episode in the history of health care cost containment efforts? Representative Barr doesn't like to think about the prospect. . I don't think that would be . all eyes in the health care delivery field seem to be focused on AHCCCS for it represents a new approach to the maze of government-funded health care. . Indeed. If we can't make this work . The counties were going broke rapidly . What happens to Arizona. when asked about the prospect. . . "Politically. realistic . Representative Barr adds. which was the county system." On a broader scale." Representative Barrflatlystates. We can't go back to the way we were. says. "I'll tell every 51 T124520386 . . Don't ask me what I'd do if it doesn't. it would probably be a return to the previous system. "I don't think we'll ever do Medicaid. . I've got to expect it's going to open. "That's what worries everybody around here.AHCCCS AND THE FUTURE "I think it would be accurate to say that all states are looking at the Arizona program. though." When posed with the question of whether Arizona might move to a more traditional Medicaid package at some point. .

You're going to be fighting this problem with every businessman. the one certainty is that health care in Arizona will never be the same." Randy Weiss takes her case directly to the medical community. . they'll be regulated . Delivery systems systematize their deliveries: providers provide. Dr." Meanwhile. we're going to have county hospitals ." The problem of rising health costs for health care does cut across income levels. . . It's in doctors* interests to contain their costs rather than to have their costs contained for them. and it'll be awful. We're trying to introduce a competitive system to force a market price. but health care costs are not. It's industry that's screaming. . Whether AHCCCS succeeds or not. the experiment goes on. We're offering a plan that forces you to compete. The prospect of what will happen in Arizona if AHCCCS doesn't succeed is as unpleasant to those working in the project as to those who voted it into existence. . ". but doesn't regulate you. Those costs now are very significant in his business because inflation is dropping. not just for the poor or medically needy. in Yuma and Flagstaff and in the Valley of the Sun. If you embrace this sort of system and realize it is the way of the future. and attempts to regulate care for all income groups could have profound consequences for health care in this country. and monitors monitor. Sooner or later the government will step in. either at the federal level or the local level. it'll be like England . .legislator in this land. you're going to be fighting this problem of health costs. . . 52 . we think [that] financially you'll be better off in the long run than if you allow prices to keep going the way they are. "Our message to the providers is . . Shelton warns that if costs are not controlled. .

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I 1 American Legislative Exchange Council Board of Directors Hon. Patrick J. Ray Taytor Iowa Senate Hon. EUen Sauerbrey Maryland House of Delegales Hon. T. Idaho House of Representatives Hon. Stivers Speaker. Larry Pratt Former Member. Donald 6. Nolan California Assembly Hon. Norma RusseH South Carolina Senate Del. *Buz" Lukens Ohio Senate Hon. Penny PUIen IlSnrjis House of Representatives Hon. David Copefand Tennessee House of Representatives Hon. William Raggio Nevada Senate Hon. Owen Johnson New Vbrk Senate Hon. Virginia House of Delegates Hon. Virginia Senate Hon. Cagte Missouri House of Representatives Hon. W. Donald Totten Former Member. Brad Gates Former Member. William Presnal Texas House of Representatives Hon. New Mexico House of Representatrves Hon. New Hampshire Senate Hon. John Brooks b a t e House of Representatives Hon. Eva Scott Former Member. Roy F. David Halbrook Mississippi House of Representatives Hon. WHam Polk Washington House of Representatives Hon. BM Ceverha Texas House of Representatives Hon. John McCune Oklahoma Senate Hon. Bob Monier Former Member. Ilhnots Senate TI24520390 .

20002 .C.AMERICAN LEGISLATIVE EXCHANGE COUNCIL 214 Massachusetts Ave. Suite 400 Washington.. NE. D.

Health Care and The States Sponsored by The American Legislative Exchange Council .

Ohio Firs* Vice Chairman Representative Edward Holloway. edited and published by ALEC and distributed to all 7. New Jersey G. Idaho Immediate Past Chairman Representative T.400 American State Legislators and Members of Congress through a moat generous grant from the Jeremiah MUlbank Foundation. cooperation and generous grants which have made possible this entire conference.Officers and Board off Director* of the American Legislative Exchange Council National Chairman Senator Donald E. Washington State Legislature The Honorable Larry Pratt Former Member. Halbrook Mississippi Senator Owen Johnson New York Senator John R. New York Pharmaceutical Manufacturers Association Washington. Missouri Legislature Secretary Representative John H.C. Illinois Senate Health Care and the States Conference May 14-15. . Monier Former Member. New York. Searia & Co. Indianapolis. Polk Former Member. New Jersey New Jersey Health Products Information Council Pfizer Pharmaceuticals. Incorporated New York. Chicago. D. Stivers Speaker of the House. Totten Former Member. Kentucky Second Vic* Chairman Representative Penny L. Scott Virginia Senator Ray A.C. Taylor Iowa The Honorable Donald L. Illinois Smith-Kline Beckman Company Philadelphia. The American Legislative Exchange Council gratefully acknowledges the assistance. D. Hoffmann-LaRoche Incorporated Nutley.1982 Washington. Lukens. Indiana Merck & Co* Incorporated Rahway. Pennsylvania American Legislative Exchange Council 418 C.C. New Hampshire Senate Assemblyman Patrick J. including scholarships to State Legislators to enable their participation. Idaho Representative Roy Cagle Missouri The Honorable Brad Cates Former Member. Nolan California The Honorable William M. 20002 (202) 547-4646 . New Jersey EU Lilly & Co. W. Street Northeast of the Capitol Washington D. Virginia Legislature Senator Norma Russell South Carolina Senate Representative Jerry Sandel New Mexico Senator Eva F. Illinois Theseii far The Honorable Paul G. Copeland Tennessee Representative David M. McCune Oklahoma The Honorable Robert B. This Health Care and The States monograph was transcribed. New Mexico Legislature Representative William Ceverha Texas Representative David Y. New York The Conference attendees and ALEC's Officers and Board of Directors express deep appreciation to the following conference sponsors: American Medical Association Chicago. Pullen. D. Dietrich Former Member. Brooks. D. Sandoz Pharmaceuticals East Hanover.C. Illinois Bine Cross and Blue Shield Washington.

Health Care and The States Sponsored by The American Legislative Exchange Council T124520394 .

tax-exempt organization serving State Legislators and Members of Congress who are dedicated to preserving individual liberty. since it reinforces the role ofALEC as a useful clearinghouse for lawmakers who need information quickly. and other background material that explains particular federal policies. corporations. The views expressed herein are those of the authors. productive free enterprise. Most of the ALEC Research Departments activity consists of personal. and limited representative government. companies. thereby allowing the states to have their views heard on the Administrations proposed plan.The American Legislative Exchange Council The American Legislative Exchange Council is a non-profit. It is further classified as a "non-private" (i. The ALEC stafFlogged over 2. proposed federal regulations. the Research Department prepares in-depth. Arnault Legislative Analyst Nancy Poptk Legislative Assistant Legislative Assistant ALEC Staff TI24520395 . Administration fact sheets. on-going contact with State Legislators. and is not an attempt to aid or hinder the passage of any bill before Congress or the State Legislatures. ALEC's Research Department / At the request of ALEC members. Those analyses range from fiscal impact statements to legal studies about statutory and judicial precedents. ALEC is the largest individual membership organization of State Legislators in America with over 1. and do not necessarily reflect the views of the American Legislative Exchange Council. the ALEC staff provided interested members with draft versions of the White House Enterprise Zone Plan. Printed in the United States of America. Slch Director of Programs Executive Assistant Daniel Bray Nanette St. ALEC is classified as a Section 501 (c)(3) organization under the Internal Revenue Code.e. basic American values and institutions. The ALEC Research Department routinely sends interested legislators copies of draft federal bills. For instance. Mariana E. non-partisan. associations. Gtiesmer Kathleen Teagae Executive Director Director of Development Jullanne Graham Thomas Mack Director of Membership Director of Research Elizabeth A. and foundations may support the work of ALEC through tax deductible gifts. Personal communication is a valuable tool of ALEC. expert analysis of bills pending before state legislatures. This information is provided as background material. the principal source of ALEC's funding. private property rights.000 telephone calls to state lawmakers last year—calls that brought together legislators from different states who were developing the same legislative ideas. ALEC receives no federal or state grants. During the last two years. Individuals.600 members. "public") organization under Section 509 (a) (2) of the Code. 1983 American Legislative Exchange Council. Another important feature of the Research Department i3 the accessibility to federal policy-making. Bennett Deborah A. ALEC has written over 100 such analyses for state bills that eventually became law. © January.

Kelly Glenna Crooks Quality Health Care and Cost Containment Initiatives: Lieutenant-Governor George Ryan Senator Calvin Hultman Assemblyman William Filante. Ph.D. Edgar Vash Social Security. Jack Meyer Steve Caulfield Coalitions to Combat Drug Abuse: Dr.D.D. Carlton Turner Jill Gerstenfield ALEC Membership Brochure Available ALEC Publications Page 5 Pagel Page 4 Page S Page 10 Page 13 Page 21 Page 24 Page 26 Page 27 TI24520396 . Harry Schwartz. M.D. Robert Helms Charlene McCants HH8 and New Federalism: George Armstrong Congressman Edward R.Table of Contents ALEC Information Introduction Congressman John Porter Honorable Donald Rumsfeld Hew Federalism—Health Care Issues: RickNeal Dr. M. Madigan The Federalization of Medicaid: Allan Bruckheim. Problems and Solutions: Peter Ferrara Block Grants and Health Care: James F. Senator Robert Usdane Private Sector Alternatives: The Answer to Health Care Problems?: William Walsh. M.

and I thought I might share with you a little story. manufactur ing. For the next five years. There is perhaps no other American with th* breadth and depth of experience in government. Appropriations Committee. burley Winnetka policemen who proceeded to go into the back of the room. We had about one hundred people out in my hometown of Winnetka. That now includes serving as a Director of Easten Airlines. served on the Joint Economic Commi tee. In 1969 when he was 36. is one of our nation premier companies in the development. Don Rumsfeld was re-elected to Congress in 1961966. So I went out in the hallway and out there were four big. We invited everyone to come out and talk with our Congressmen and spend some time making statements or asking questions. eliminatm. Education Subcommittee. When they took him out the door. my executive assistant rushed to the front of the room and said. Human Services. and th Committee on Science and Astronautics which w* probably the hottest committee in the Congress in thf age of Sputnik. Member Labor. a home and internationally. put him in handcuffs. and of Sears Roebuck and also as the Chair man of the Board of the Rand Corporation. I went back into the room and explained all about the policemen and the man with the revolver. Don resigne from the Congress and many of you will appreciate th* was probably a flash of brilliance. unproductive facilities. would you please just answer the question?" Don Rumsfeld graduated from Princeton in 1954. grab a fellow. Illinois on the north shore of Chicago : run for Congress and to be elected when he was at tr very young age of 29. an* tough and at the very bottom line." This had never happened to me before. The woman who was still standing there said. he chaired President Gerald Ford's trans tion team and then served as Chief of Staff of the Whit House and as a member of the Cabinet. If you look at what Don ha accomplished in a short time at the helm of Searle i: streamlining its structure and operations. Th< Honorable Donald H. because it is important. and. CertainI: not one at such a young age as our featured speake tonight. In 1977. while headed to Washington after law school to work with tr Justice Department. T124520397 . and I thought I had better do as she said. and marketing of pharmaceutical and optical prod ucts. About half an hour into the program. That was in 1962. as you know. before bein appointed in 1975 as our nations 13th Secretary c Defense. This is an audience that is largely made up of public officials. Assistant to the President an Director of the Office of Economic Opportunity. strong.38 caliber revolver. D. Don left government service and becam President and Chief Executive Officer of G. Come out the side door. served on tr staffs of two Members of Congress and then. and he served as a Naval Aviator for three years after that and won the All-Navy Wrestling Championship. / He then went on to Washington. and 1968. you must come out in the hallway. he served successively an successfully as first. I want you to remember that. Cour selor to the President and Director of the Cost of Livin Council. Rumsfeld. and I am most proud to present him. profitable then you'll understand the kind of strength and skill that Don brings to all he undertakes. the Government Operations Committee. "Congressman. understanding Don. Don Rumsfeld had headed horr to Winnetka. a woman was standing up asking a very involved question about the Clean Air Act. making it lean. and in business. Searl and Company which. At least it is now. just at that moment. Member District of Columbia andForeign Operations Subcommittees. and then overseas as our Ambassador to th North Atlantic Treaty Organization. Health. and take away from him a loaded cocked . of course.Introduction Introduction Congressman John Porter Illinois—Member. This is the first opportunity I have had to speak to you. "Look. I hope that it will not be the last and that it will be the beginning of a closer and more active involvement. Illinois. In 1974. About three weeks ago we had one of our town meetings in our Congressional district. pull him out. There is an emergency call for you—you have to leave.

He left out the fact that when I was at OEO I came home one night and taped to the ice box was a clipping my wife had found.S. I am not about to get into that subject. Chairman. and that gets people out of bed in the morning to try to make things better. After many years in government. when for two drinks we can be strong and smart" Now that's the first time you all have heard Shakespeare and Sam Rayburn quoted in the same paragraph. and one who was shot and. Actually. one who was not elected (the first in the history). "I am plucky. About a year and a half ago. government is easy. he went right to it He tackled the job that couldnyt be done. stopped the boat. I don't know if it's working or not. I am told. We have had one who was assassinated. it's a pleasure to be engaged in private enterprise. with all the experts on health care in this room. can the taxes be provided for governments. GD. that was a fine introduction. but it won't live long without hope. Former White House Chief of Staff under President Gerald Ford. It reminds me of that wonderful quote from Shakespeare. It was during the Eisenhower Administration. Itb a worthwhile activity. He was intending to talk to you about health. 1981—a relatively short time ago. Despite the fact that I am in the health care industry. one who couldn't run for re-election because of the war in Vietnam. one who resigned (the first in the history of the country). I appreciate the introduction also because he left out some things. but I am not stupid. As Pierre Salinger once said. the yacht that used to go up and down the Potomac. I am afraid that is not always the case. and in his place they selected an uncertainty who represented hope. It made me sound like I can't hold a job." Or to quote Sam Rayburn when he said. weak and dumb. And only by doing it profitably. and marketing something that is needed by human beings throughout the world. He took them down the Potomac River. And now people say. we have seen a lot of hope and uncertainty in the intervening years. our country can live with uncertainty. that activity where one goes about the task of developing. thank the Good Lord. that we have to change it. A good portion of it has only been in place for the last six months. walked back. and I read in the newspapers.he vas lat ted lat nd . ALEC Business Policy Board. Former U. Eisenhower was the last President to serve two terms. that fuels effective action. and can the kinds of products and services be made available that provides progress and improves •ne de n's lr>d>. and earning a return for the investors. Every morning he would get hit by The Washington Post. that President Reagan's program is not working. wrestling with a collection of problems that have been accumulating over a long period of years. It's a tough job being President of the United States. If one thinks about it. one who was a mistake (not the first in the history). That hope is the thing that energizes people." John Porter." I am amazed.Searle&Co. much of his program wasn't put in place. I am substituting for the Secretary of Health and Human Services. So he took the editor and publisher of the Post out on the Sequoia. and couldn't do it. Part of it started in October. First of all. It said: He tackled a job that couldn't be done. Ambassador to North Atlantic Treaty Organization. Former Member of Congress. It reminds me of that wonderful story about a time before Jimmy Carter sold the Sequoia. "Why are we sitting here. put down the gangway. who is a friend from Congress. and climbed up the gangway. The next day The Washington Post said: "The President can't swim." . we have to change it. One of the Presidents was thinking that it was just tougher than blazes being President of the United States.nd inner he -siite ng of Donald Rumsfeld President and Chief Executive Officer. He left out the fact that I managed two campaigns in the 1950s and lost them both. the American people went to the polls and voted. It's only been in place about 15 minutes. Regrettably. ut. Now. but I liked it.Introduction sin the el the me • to the 64. Former Secretary of Defense. With that kind of support. with a smile.1 was just out of the Navy. can the jobs be provided for society. walked down the gangway out on the water about 20 paces. "It's not working. But I know of certain knowledge that we do not know that it's not working. As one thinks about it. I came to Washington back in 1957. Ifs an activity that ought not to be undervalued by society. has recovered and is back on the job. Dick Schweiker.. turned around. The American people need to feel that things are going to be better for them as human beings. manufacturing. I intend to stray a good deal from that subject. They eliminated a certainty that had been demonstrated to be in ng nd Us rn irhe at \y er he our society. "Something neither good nor bad but thinking makes it so.

It passed through 8 percent o: percent for last year. If you think back one. Think of some of the problems we have today with unemployment. liberals and conservatives. with unemployment where is. that inflation was the number one problem in the country. but. research and development and savings as a percent of GNP have been declining relative to Japan or Germany. this isn't the way it is in real life. There was concern that it was ravaging the society—that the elderly weren't able to cope with it. We have a country that seems to feel that we can solve our problems in a relatively short period of time—in the 30 minutes that it takes a television show to have the crime committed. S. though the rate of increase taxes was moderated. the crime is solved.introduction Its worrisome. we have to increase taxes. he will realize that if they didn't another single thing. pause. down to 4 percent." Can you imagine. today inflation is down. But does anyone say that? Do you e\ hear it? I don't. U. they are high. what we he done has helped that which we agreed was the sing biggest problem in the society. The result. The Congress today has a horizontal leadership structure that makes it difficult for those in the executive branch to plug in and work with Congress in a constructive way. policies that tend to penalize work. Those are two exceedingly important steps. the fact of the matter is that tax were never really cut. particularly the House. Given that fact. and that it was driving the people in the middle income brackets up into higher and higher tax rates. Its less clear that we're good at dealing with trends that occur incrementally over a sustained period of time. namely. We ask how did it happen that things seemed to get out of control. the middle of a recession. And yet everyone is running arou saying: "We have to change direction. But fundamentally. Its clear that in the United States we have demonstrated that we're good at responding in a crisis. TI24520399 . by t way. a bit unruly. As hard as President Reagan works and as ha as a lot of people work. and say: "Fantastic! Somethi right happened—something we needed to have happt happened" Still. Well. research and development. is a patchwork tax system. and a Congress that is. and not on costs. the first thing we can say is that it didn't happen fast—it happened slowly. and plant modernization. that it was damaging the opportunities for young people. real or imagined. A terribly imports event occurred. there was almost uniform agreement among Republicans and Democrats. we ought not to be surprised that we've arrived where we are and that the magnitude of the problems facing the President and the Congress is as great as it is. My impression is that if one thinks about tl administration. Well. But if they happen slowly. of course. rather than on results. Think of what we have in the executive branch. He has the direction going in the right wt and it seems to me the task now is to calibrate it and be happy that we are going in that direction. think what we're tackling. Yes. you can say that's r. we tend not to react to reverse those trends. high interest rates. I'm not going to say they are not ixnpi tant. on trying. But. What fantastic success. AT we ought to stop. 5 percent ant percent. two. substantial debt. productivity. as each of us knows. There was a focus in the Congress on benefits. There was a focus on effort. savings and investment. All I hear about is interest rates a unemployment. The tax cuts we too deep. The Federal Register is growing at a 25 percent compound growth rate. we penalize. depending on how you annualize it. They ha said that we have gone too far in allowing o capabilities as a country to decline and we must g about the task of investing in them so that we have t capability to contribute to a more peaceful and stat world. They have said that we had gone too far and i time to turn and see that we get a better balan between government and the private sector. what the people elect him to do. and everyone is happy. the academicians and practitioners. you can pick at this. fault them. they have been directionally c( rect. rather th: the direction we were going. You c. increasing taxes? That is one of the worst ideas I' heard. or three years ago. President Reagan is doi: what he said he was going to do. even though those trends may be distinctly adverse to our interests. perfect. a about unemployment. People had seen what had happened in Germany and Latin America and knew that it would be unacceptable to allow inflation to get to that point. The things that we need and ought to be rewarding. It's down from double digits to single digits. Of course. inflation. they are terribly important. people want to know about interest rates.

1 tietv Federalism—Health Care Issues or 9 id 6 it a iver and porlave lgle aid. and local officials to reach agreement on legislation to send to Congress. a 4. The underlying principle was the return to states and municipalities the revenue sources needed to finance the programs that can be best handled by local government.S. However. and the revenue sources for funding the programs. and the states would assume responsibility for some programs that have been managed at the federal level—has been proposed for Medicaid and Aid to Families with Dependent Children. the amount paid out of pocket by the patient went up from $7 to $9. What has been dubbed a "swap"— meaning the federal government would take ovei responsibility for some programs which have beer managed by the states. The concept of the New Federalism is not new but relates to the sorting out of responsibilities between the federal and state government as outlined in the tenth amendment to the U. are reserved to the states respectively or to the people" President Reagan has been speaking out for twenty years about the proper vesting of powers to the states. Robert Helms One of the effects of the growth in health insurance is that it hides the cost of medical care in the corn's nee ave our get the tble can not •ing ted vay.ard «es i in this . Between 1950 and 1980 the average cost of a hospital day went from $22 to $99 in constant dollars. Dr. State Legislators. The other part of the program is a turnback of 43 categorical *eit I've '. mayors. the specifics on these taxes are under negotiation. the President outlined a federal initiative to designate responsibility for the nation's major welfare program. and the ant und /ere ». The programs would be funded at the state level by a trust fund composed of various taxes dedicated for the fund. Department of Health and Human Services. With Medicaid. Deputy Assistant Secretary for Planning and Evaluation. Executive Director for the Presidents Advisory Commission on Federalism.5 fold increase. This group has met frequently am engaged in a dialogue needed to develop an acceptable federal program. In his 1982 State of the Union message. Executive Director for the Territories Task Force. Executive Director for the Puerto Rican Task Force. Director of the Office ofHealth Planning. Medicare and private insur- . the President appointed the "Presidential Advisory Committee on Federalism" made up of representatives from all lines of government.ian New FederalismHealth Care RickNeal Special Assistant to the President for Intergovernmental Affairs. Since then. Secretary Schweicker at HHS and his staff have worked extensively with state and local officials to reach agreement on the program. "the powers not delegated to the United States by the Constitution nor prohibited by it to the states. Constitution. during the same 30-year period. These negotiations are still underway. J to . This is a very broad outline of the federal initiative and I wish to thank ALEC and the many State Legislators throughout the country for their assistance and involvement in making this program work. governors. Chairman of the Secretary's Task Force on Hospital Regulation. In April of 1981. State Legislators. ung )en. we at the White House have been meeting with governors. Con- gress. so the states could set their own priorities. This swap portion of the federal initiative has made agreement difficult to reach with state officials although there has been consensus on the general conceptual framework of the federal initiative. local officials ant private citizens.

It will not cause the wholesale failure of hospitals.8 percent. Most of the growth in the 1983 budget occurs in the entitlement programs. My offices had the lead in developing the competitive health care proposal for Secretary Schweiker. Second. people are taking low-cost items such as dental care and adding it to their health insurance policy to avoid paying taxes. There are six major initiatives in the department: entitlement reform.9 percent of that increase in expenditures. which is $274 billion. The price increases in the hospital section. over and above the general rate of inflation. an increase of $20 billion over last year. and to create competition among providers and reward providers who are less costly. Let me summarize what we have tried to do to deal with these basic problems. Third and probably the least understood of the factors affecting health cost. Cost sharing would provide incentive to consider cost and help eliminate some of the hospitalization which most medical experts believe could be reduced without reducing the quality of care. In this current fiscal year. let me go to the health coat problem. As an economist. have less incentive to worry about cost. The first step this administration could take to help the health cost problems is to lower the inflation rate. while Medicaid and Medicare have increased health care accessibility for the aged and the poor. and 2) How can the government disentangle itself from the internal management of hospitals? l b this end. . Our task force wants to simplify them and we are grappling with two issues: 1) How should the government regulate medicine in the future?. A great many Medicaid and Medicare regulations have accumulated over the last years. We have very little discretionary effect on the budget of these programs. The major cause of the health cost problem is general inflation. to give people an economic reason to seek less costly care. the bipartisan presidential commission on Social Security reform. we have proposed Medicare cost sharing and a new catastrophic benefit to put a limit of $2. The Social Security Administration and the Health Care Financing Administration. almost every case of the general rate of inflation accounts for more than half of that increase in expenditures. But. Our proposal will not make health care a freely traded commodity or place an undue burden on the consumer. This would give the Medicare population increased choice of benefits and insurance policies and increase competition.500 per year on the amount paid by the patient. It will not interfere with or intrude into management or labor agreements or benefit packages. the patient and the physician. But because of the tax structure. which pay for Medicare and Medicaid. such as a bad car accident. the National Institute of Health and Head Start. The first is the system of retrospective cost base reimbursement. The first and second party. we will publish a revised set of regulations affecting hospitals so that they may manage themselves without government interference. new federalism and regulatory reform. But this will not eliminate the cost problem in health for three reasons. is the open-ended tax subsidy for the purchase of private insurance. Introducing competition into the health care sector is controversial. In addition. it amounts to 36 percent of the total federal budget. During any term period of expenditure increases in the health sector. large expenditure events. We have proposed a voluntary voucher system for Medicare. we are paying more third parties. the federal government will lose about $27 billion in revenue because it does not tax health insurance. Now. I want to give you a few facts about the proposed 1983 budget for the department. I want to talk about our efforts to restore some marketplace incentives to the health care field. but I think it deserves serious consideration now.2 New Federalism—Health Care Issues ance. Our goals in this health care proposal are simple: to encourage greater consumer cost sensitivity. account for roughly 9. I have been involved in one of the task forces on regulatory reform which Secretary Schweiker established — hospital deregulation. Recipients could receive government payment and get their insurance from private insurance carriers. together constitute 95 percent of the 1983 outlays. expansion of block grants. The principle of insurance is to insure against low probability. I would organize the several plausible explanations for the cost problem in health into four separate points. they have contributed to the cost problem by increasing the demand for health care. This is relatively small compared to the general problem of inflation and demonstrates why a regulatory approach to health cost containment is doomed to failure. The principle of competition guides the bulk of our market economy. which does not provide incentives for efficiency. For the hospital it is 52. l b put this sum in perspective.

In addition. Health Care Financing Administration. We are looking at long-range reforms. rs or al >n w lr re it T124520402 . the White House Conference on Aging and our department Our approach will have to meet certain objectives. the bottom line is that the new system must cost less than the current system. and provide for reliable predictability of our expenditures so that federal and hospital planning can be done satisfactorily. and HCFA is intent on meeting this challenge. The system must encourage our beneficiaries to be cost conscious and hospitals to be efficient and must be easily administered and understood. We want to move toward prospective payment for hospitals. we need to concentrate our efforts on those spending components with the largest dollar amounts. if we can provide some alternative. which is the waiver on home and community-based care. It must be compatible with the administration's effort to instill competition and be extant long enough so that it can be developed fully.3 New Federalism—Health Care Issues is :e o te ii:e Chariene McCants Associate Administrator for External Affairs. Our attempts to find cost savings in Medicaid began with the Budget Reconciliation Act last year. These programs serve some 48 million beneficiaries and will cost nearly $74 billion in 1983. HCFA is working with the states to restructure Medicaid programs so that they are more easily managed and is approving as many waivers as we legally can. HCFA is currently working on Section 2176. we are now allowing states to cover nonmedical home and community services. Associate Administrator for Management and Support Services. Through this waiver. Provisions in this law offer greater flexibility to the states in both n i- . and to support people who would otherwise be forced into institutions. but also provide it in a most cost-beneficial way. we hope to address our current fiscal problems because we must live within our budget now. the design and operation of Medicaid programs. and we are also sorting out federal and state responsibilities. we want to change the way we reimburse hospitals. the Congress. ir /e n. we can not only provide the kind of care that is actually needed. Since two-thirds of Medicare expenditures go to the hospital industry and physicians' fees are second. therefore. We have long known that there are people in nursing homes who do not really need the level of care there.e is i3f If is id ty is of :h IP e. Health care and government can certainly be separated. which has been largely responsible for the 18 percent annual inflation rate in the hospital industry. provide an immediate restraint on the growth of federal outlays. We now have a cost-base retrospective reimbursement system. lb make any substantial progress in controlling the growth in Medicare and Medicaid. All of our data indicates that it is much more* costly to care for people within the institution than outside. The approach that we are taking in HCFA is two pronged. The Health Care Financing Administration (HCFA) is concerned both with Medicare and Medicaid management.ile 9t e. In the short term. tackle the growing problem in the hospital insurance trust fund. our major legislative proposals seek immediate cost savings in those areas. Of course. a system which has been recommended by consultants in the Held.

But hospital costs have been rising at twice the rate of inflation. They are the HHS people that are assigned to states to give any assistance regarding new federalism initiatives. Again. What we are proposing in the new federalism initiative will directly affect them. The undersecretary's office for intergovernmental affairs at HHS is the entity that is charged with the responsibility of working directly with legislators. while hospitals were presumably struggling so hard to keep costs down. we are going to put on a full court press. This does not make sense. We need the support of the President and of Congress. and each was able to find fault with what the other fellow was proposing. inflation was increasing at ar annual rate of 3 percent and hospital costs were rising at an annual rate of 19. The hospitals were trying to tell Congress that inflation was the reason foi hospital costs going up so much. When we talk about putting programs back into the states. We are looking forward to getting more participation from State Legislators. i system for waivers at Health and Human Services (HHS). Then last year we talked about competition bills. During that effort. For a couple of years we were involved with hospitals in a voluntary effort. If inflation is 3 percent then why are hospital costs going up at a rate of IS percent? When we ask that question of hospital people. My job. Yet. We want to accomplish this before Memorial Day and get something that we can take to the Hill so that we can get support from the National Governors Association. We are seeking proposal ratification on the swap and the turnback program. Finally. I would emphasize one more time that I would like to work closely with our regional directors on a local level and that legislators Earlier this year. we mean that these programs will be controlled by legislators. every hospital organization has its own proposal for prospective reimbursement and each finds something about the others to criticize. We are depending on our regional directors. Legislators are looking at the Medicaid transfer . Meanwhile. they respond that. there are problems with doctors and drug costs. in addition to inflation. again more than the rate of inflation. We sat there pondering the differences and the year went by with nothing being done. The only way that we can guarantee that there are no surprises for these people is if they are involved at every stage of the negotiations. primarily. is one of making sure that legislator communications to the department are directed to the right people. we find that doctor bills have been increasing at a bit less than the rate of inflation over the last five or six years and drug costs have been increasing at less than the rate of inflation. we continue to confront this tremendous escalation of health care costs and now are involved in the question of the states taking over certain areas. This year we started out still talking about competition bills and bills for prospective reimbursement. lb accomplish this.3 percent. costs increased at an annual rate of 16 percent. Different hospital organizations also have their own competition proposals.4 HHS and Hew Federalism HHS and New Federalism who feel that things need to be handled at a higher leve should call our office.

MD Editor-in-Chief. Hospitals calculate how many Medicare/Medicaid patients they would handle during the course of a year and figure out the reasonable cost of providing services to those patients. David Stockman's plan features prospective reimbursement. if the hospitals are able to operate more efficiently! they would have a profit. There are no easy ways for those who accept the responsibility of providing health care. as Americans. The idea of transferring authority and responsibility back to the states is fine as long as there is an even trade in dollars and responsibilities. For example. then perhaps we can encourage consumer resistance. Mary's Hospital. How long will it be before some state legislatures and governors come to Washington to ask the federal government for help with those additional health care costs? Will we have accomplished anything at all? I don't think so. and it may ease the burden for consumers. Government and professionals must accept total responsibility because when the structure or the system fails. can the greatest good result. It is important to have a dialogue between members of Congress and members of state legislative bodies to assure that the administration and the governors haven't worked out something that nobody wants. Doctor-in-Residence at St. Host ofDirect Line Medical Program on the Physician's Radio Network. The Federalization of Medicaid Allan Bruckheim. and mortality means unnecessary deaths. But what prevents the hospitals from taking that money for Medicare/Medicaid patients. Bills will be introduced in state legislatures around the country to create new programs to pick up the difference between what the federal government is paying through prospective reimbursement and what the hospitals are really charging. Two words describe the results of incomplete medical care—morbidity and mortality. they would have a deficit. The process commences with some bright and sparkling . it is realistic to expect that the differential costs are going to be pushed back on the consumer. In my view. The federal government must look at a much larger population of individuals than any individual state. Our task here is to comment on the possible federalization of Medicaid and to offer a critique which would contain positive ideas and proposals. have an interesting way of fashioning the laws and regulations which govern us. business and government. During the course of the year. then the federal government pays them that amount of money in advance. There are no short cuts. and then charging the patients above that for what they need to do? If that happens. If we can involve them by having them pay a little bit of their bill as they go along. all are guilty One essential difficulty in approaching any reimbursement plan for medical care from the federal level is that of numbers. The only way to handle such huge numbers and so many variables is to use averages and medians and means to assume some middle position and thereby encompass the great majority of patients who need care. the major problem in the financing and delivery of health care in the United States today is the third party payer phenomenon. Morbidity means human suffering and pain. Medical Times. medicine deals with individuals and not with averages. However. It works well in the free market.5 The Federalization of Medicaid concept right now. Family Practice. We. If they were not able to do that. People don't know and don't care how much hospital bills cost because in most instances they don't have to pay anything. Only when medical care can be individualized to the specific needs of the specific patient.

since it does not strike at the roots of the cost problem. Government may decide to cut the budget for medical care 3 percent. Each regulation has in mind the intent of the original legislation. Now what is the source of explosion of cost? The first is that we have an improved health care system which does more for people. It may pass through the hands of administrators and they make regulations. there was not very much you could do for people. So. each regulation to be followed. When the system fails after all these changes. when dealing in health care systems with regulations and rules.D. is the best in history. but you three will not receive medical care today. the problem with health care in the United States is not that it is too expensive. Health care providers must be trustworthy. In this area. shoot people! It is the ultimate cost containment. $2. 70 or 80. With these.00 spent in health care in the United States comes from third party payers. we the practitioners of the healing arts cannot put into practice that which government so easily puts into words. it then has to pass through a number of compromises. we have decreased the ageadjusted death rate by almost 50 percent. But the reduction causes trouble on my side of the fence. Retired member of the New York Times Editorial Board. brilliantly conceived. We keep people alive longer and better. A health care system which keeps people alive longer gets more and more expensive. New York. we can do a great deal for people. Columbia University. must accept responsibility while striving to get the most medical care for every dollar expended. but look how cheaply they will die. we must address it to the problem and the care. each form to be filled out.6 The Federalization. it is too cheap. Whatever care we choose to support. we must establish guidelines. by every statistical measurement we have. and using averages and means as guides we must provide suitable avenues of care for the unusual. Medicaid. My budget has been cut by 3 percent. we cut our infant mortality by more than half Since the end of World War II. In fact. Most of the health care in the United States is not paid for by those who receive it. In the last fifteen years or so. we do not scrap it. I cannot say to the last three patients out of hundreds. each paper. the less we attempt to do. socialized our health care system. Harry Schwartz. The responsibility of a government is to serve the needs of its citizens. articulately advocated. The problems we face are the result of the successes of the health care system. the government health provider and patient alike. I cannot take 3 percent off an appropriate dose of medication because I will lose the efficiency of that medication. This cut translates into so many dollars saved and a balanced budget. we modify it! Often. A lot of people will die. ofMedicaid ideas. Ph. whatever problems we choose to address. College ofPhysicians and Surgeons. the unique and the individual. the system has a chance to work. If we want to keep cost down. I cannot reduce my paperwork by 3 percent. We must be aware that each interaction placed between the patient and the physician. We have made most health care costs the problem of third party payers. From the point of view of the patient. A government's attitude should be a pragmatic mix of fiscal prudence and humanistic benevolence. As a physician. One element of the cost problem is that we are paying the price of our success. The health of the American people today. The cheap health care system is one that lets them die. so that the basic idea is pushed through. For 1980. As the ultimate solution to an insurmountable problem. Writer in Residence. Today.00 out of every $3. my need for compensation probably increases my paperwork. We give them a better quality of life. increases the total cost of medical care without adding anything to either the quantity or the quality of that medical care. There is nothing that I TI24520405 . we do not replace it. The basics tell us. and politically sound. the better off we shall be. "I am sorry. The second one is that we have to a large extent. "In the good old days" when more than half of all children died before they reached the age of one. President Reagan's proposal to federalize Medicaid makes no sense in terms of cost containment. each obstacle. if you want to know the secret of cost containment. President Reagan is not proposing that. We must make provisions for the uniqueness of the human state. Trade-offs can be made." Above all. try the following: for six months prohibit the use of any antibiotic. I cannot say I will reduce my patient's fever by 3 percent and make a thermometer at 101 degrees read 98 so that the patient can go home. We do have the world's most effective medical system. Not many of them reached up to the ages of 60.

His suggestion was that we abolish all first dollar insurance. state. He is solidifying the federal hold upon the payment of medical care costs in the United States. What we have done. As the data indicates. The potential demand for free medical care is infinite and our resources are finite.7 The Federalization of Medicaid can do so cheaply in my life as enter a hospital. in effect. they have universal and comprehensive national health insurance. What he said. pajamas. In Britain. not medical. If we want to use those finite resources for many other purposes besides medical care. I don't have to be cost conscious. Felstein defined catastrophe as medical costs in excess of a certain percentage of the family income. with several health insurance policies. is not the greed of doctors nor the incompetence of the hospitals. But I must say that even the Felstein system is not perfect. Simply set up one catastrophic system through which a person pays for his own care out of his own pocket until it goes over a certain specific percentage. is eliminate all incentive to economize. paid about 40 cents out of the medical dollar. we must get rid of free medical care. every year. I become stingy. when it comes to paying for something out of my own pocket. However. federal. Finally. The reason for the explosion cost. what more do I want? Somebody will bring along newspapers and books to read. Second. Give me a bed. I am willing to spend somebody else's money for the best hospital care around. The real problem is the person who gets a serious illness. Professor of Economics at Harvard University. More seriously. keeping what is left of Karen Quinlan alive by giving her total nutrition and antibiotics. President Reagan is making an administrative change in federalizing Medicaid. the federal government paid about 28 cents out of every dollar of medical cost. was do not help those who do not need help. However. who proposed it about 1970. Edgar Vash ALEC Analyst Legislative Any change in Medicaid from the public to the private sector should emphasize four fundamental principles. We offer people a system of health care paid for by somebody else. Naturally the costs skyrocket. Fourth. abolish Medicaid and abolish Blue Cross/Blue Shield. The inevitable alternative is some form of rationing. choosy. Reagan is essentially proposing a major step toward universal and comprehensive national health insurance. This is unappealing because only a relatively small number of people have catastrophic illnesses. food and free TV. They cannot pay the bill either. comprehensive national health insurance. the more we are going to blow up the cost. His first requirement was to abolish all first dollar insurance. abolish Medicare. and local payers. it lays the groundwork on which the next Democratic or liberal Republican president can give us a disastrous universal. state and local paid about 11 cents. Most people can take care of their medical bills most of the time. Because under my Blue Cross/Blue Shield policy. after Martin Felstein. it would seem that we could best solve our problems by using what I call the Felstein plan. the federal government can serve a more useful role as a purchaser than as a provider of services: the federal government should be the mediator between people trying to purchase supplies and people trying to provide supplies. In light of these problems. If we federalize Medicaid. I want the best. we are giving the federal government 40 percent of the medical dollar and that is going to grow. If we assume that they are all amalgamated and forgive some slight inaccuracy at the margin. In 1980. economical and cost conscious. First. If we want cost containment that is the way to get it. It leads to spending tens of thousands of dollars. The more we make medical care seem free to the patient. I can be hospitalized 365 days a year and not pay a penny. the Reagan proposal does not make any sense and does not approach any of the fundamental problems. that the private sector now TI24520406 . The third principle is that the problem with health care is financial in nature. No one is as economical as a consumer who must pay for something. The average American goes to the doctor three or four times a year for trivial complaints. niore than 90 cents of every dollar of hospital costs in the United States is paid for by third party payers. If it is cheap. the private sector is a more efficient and more equitable provider of health care than is the federal government.

Both the liberals and conservatives are in troublover Social Security. Social Security is first of all. exemptions. thliberals' program. lawyers and corporate executive should be paid large government benefits regardless o wealth. the government buys supplies and equipment and regulates interstate commerce in the health industry. In the purchasing sector of Medicaid. I will attempt to make clear wha the "inherent contradiction" is. payment of claims. The final sector of Medicaid which needs change is activities of mandated schooling. The last option is to require that all unused items be bought back after a 24 month period. The general revenues that now finance Medicaid or proceeds from the sale of federal. with the money returned from that revolving loan fund. A third option in turning over the providing sector is the establishment of voucher projects with funds from one of several sources. the responsibility of averting a Social Security disaster Conservatives oppose general revenue financing an< after their successful national campaign in 1980 on ai anti-tax platform. Medicaid's production sector is probably the biggest part of the Medicaid industry. Social Security: The Inker ent Contradiction. reporting. Tbday. All tax credits. A second option allows pharmaceuticals and any other health care providers the option of buying stock inside a Medicaid corporation. Born of Franklin Roosevelt and thNew Deal. cannot support raising the payrol taxes. becomes a plus for the Medicaid system. This trust fund can be maintained by reinvesting insurance premiums. The long-term reform goal of the conservative Social Security: Peter Ferrara . We can revise the present law that mandates the use of bidding in multiple purchase agreements. warehousing. this long-term reform goal still appear feasible. It is the providing sector. even tually eliminating the payroll tax. First the sector could be converted into a revolving loan fund. auditing. hav. The only tax deductions permitted would be contributions to the Medicaid system at the state level. But even the liber als have begun to wonder why everyone. including retired doctors. If a Medicaid recipient has gainful employment after two years of receiving the service Medicaid would act like any other loan fund. Author of Social Security: The Inherent Contradiction. It could be turned over in one of several different ways. All of it could be contracted and indeed should be in order to be in compliance with an Office of Management and Budget circular known as A-76. debt collection. not from the complete medical Medicaid fund that now exists. so that the health care industry will have a chance to provide services to government. It is the sector from which the low income and underprivileged actually draw money to cover a specified Medicaid service. licensing. where the actual financing and payment occurs. the program has an impeccable liberal Jin eage and is the showpiece of America's welfare state The long-term reform goal for the liberals has been tt finance the program out of general revenues. That will make Medicaid solvent while at the same time giving some needed tax relief. data processing and record keeping. Another possibility is to accelerate debt collection. Problems and Solutions Special Assistant to Assistant Director for Policy Development and Research at Department ofHousing and Urban Development. I wrote a book titled. The conservatives. itemizations and deductions that a health care business can currently deduct under existing tax codes would be wiped off the books. state or local property and equipment could be used. The recipient would owe a nominal fee of 3 percent to 6 percent interest which.8 Social Security: Problems and Solutions needs greater incentives to assume a dominant role in health care. We can also require that all purchase orders be taken from a special trust fund. with Ronald Reagan in thWhite House and heightened power in Congress.

Our reform would eliminate this double-dipping problem by paying welfare benefits solely through the means test. though they will receive benefits on top of their already substantial pensions. They appear to still believe this is politically feasible. With this program. Consequently. With the baby boom of the 1940s. Finally. demographic trends or political whims. This last point is particularly important. he would receive joint IRA/Social Security Benefits. If we are to make substantial permanent progress in our efforts to cut federal spending. The reform would cause an enormous increase in our nation's savings and capital supply. The program would not be vulnerable to short-term economic instabilities. The benefits problem is that today's young workers should not make their future plans based on the expectation of receiving such benefits. and shift the insurance segment to the private sector. There is nothing humane in perpetuating a system that leaves the retirement security of an entire generation of Americans in jeopardy. including both the employer and employee shares. But quite to the contrary. IRAs themselves would have to be modified. the maximum amount individuals could contribute to IRAs would always have to be at least equal to the amount which could be deducted from their Social Security taxes. shifting reliance from centralized bureaucratic government institutions to cooperative decentralized productive free-market institutions. A solution to the Social Security problem is to separate the welfare from the insurance sector. For example. individuals should be allowed to purchase life. Not only are the benefits promised to these young workers inferior to those available private alternatives. "Pay as you go" financing also leaves the program vulnerable to adverse demographic trends. This would occur because individuals would take money they currently pay into Social Security and save it in their own IRA accounts where it is invested in the private economy. As the deductible percentage of Social Security approaches 100 percent. The immediate increase in savings and capital should help bring down our current interest rate. Those who point with alarm at the long-term financing problems of the program are often accused of being irresponsible. The first step in the proposed reform would be to allow individuals to deduct their annual contributions to these Individual Retirement Accounts (IRAs) from their Social Security payroll taxes up to an annual maximum of 20 percent of such taxes.9 Social Security: Problems and Solutions has always been to turn the program over to the private sector. Indeed. disability and all health insurance through their IRA accounts. Another major advantage of the reform is its positive effect on the economy. the number of benefit recipients early in the next century will be rising sharply at the time the work force will be declining. federal employees receive Social Security benefits based on short-term or part-time private sector employment which makes them appear poor. all of this would be accomplished without raising Social Security taxes or cutting Social Security benefits. In the fully-funded private system there would always be enough funds on hand to pay for all crude benefit obligations. the program is left vulnerable to short-term economic trends such as inflation. unemployment. the short-term solution of the conservatives is to cut benefits. The second step is to reduce the future Social Security benefits of individuals to encourage them to take advantage of this option. As a result. The elderly have nothing to fear from this reform. Moreover. Problems result in today's Social Security system from the fact that the program is operated on a "pay as you go" basis. it is those who would induce todayfe young people to base their future on benefits that can never be paid who are irresponsible. When the employee retires. Then these accounts could perform all of the insurance functions currently covered by Social Security. A sharp increase in savings and capital should also result in a sharply higher GNP. and it does not have a true trust fund to finance future benefits. this is one of the few proposed Social Security reforms which does not involve cutting benefits in some fash- . This reform would eliminate the waste of welfare benefits on the non-poor which occurs through the current Social Security system because there is no means test. such a reform would be essential. they are unlikely ever to be paid. and recession. The reform would denationalize a large portion of the insurance industry. This makes them eligible for many of the welfare benefits in the current Social Security benefit structure. Individuals could also direct their employers to contribute up to 20 percent of the employers share of the tax to their IRA with the employer again deducting this contribution from the Social Security tax. followed by the baby bust of the 1960s. eventually amounting to hundreds of billions of dollars annually. each individual will be free to choose from a variety of options available in the marketplace—the package of retirement and insurance coverage that best suits his individual characteristics and preferences.

Critics of this viewpoint have said the states are not sensitive. that they are not willing to face up to their political choices. the willingness and the desire. Former Director of the Office of Administrative and Management Policy. Our efforts on this first premise were to simplify the programs and to develop regulations which were as non-specific as possible. and they do not possess the administrative capacity to do these jobs. We feel that the states are certainly up to interpreting the statute and to keeping J a m e s F. they have the administrative capacity to do the job. Kelly TI24520409 . 80. could interpret the statutes that Congress passed as well. Department of the Interior This administration began to develop block grants and other federal initiatives on the premise that there is nothing that the federal government can necessarily do better than state and local governments. Office of Management and Budget. More and more of what I see leads me to believe that not only do the states have sensitivity. but given the opportunity. Block Grants and Health Care Deputy Assistant Director of Intergovernmental Affairs. Our second premise is that state government officials and state and local elected officials. and in some cases even better. embellishing or interpreting the statute in 60. than federal bureaucrats! Our focus prevents regulators from repeating. I would therefore expect that the elderly and the organizations which represent them would support these changes so that their children and grandchildren could have better lives.10 Block Grants and Health Care ion. or 100 pages of regulations.

The alcohol. The HHS block grants were first. Education. It is composed of the Office of Management and Budget. This indicates that the block grant programs are in fact different animals than those of the categorical programs. We proposed to combine administrative funds for the Aid to Families with Dependent Children (AFDC). The Department of Agriculture administers the food stamp program and the Department of Health and Human Services administers the other two. three of which are in effect in 48 states. We reduced the time period from about six months to about six weeks for approval and publication of regulations. Approximately 16 major block grants covering more than 100 categorical programs will go into effect. This should eliminate some of the reporting requirements and regulations that have bogged us down in the past. The primary care block grant is a very narrow block grant that was enacted in 1982. the preventive program and health services. An administrative block grant to be introduced in our 1983 budget is a combined welfare administration fund. Essentially. Housing and Urban Development. simplifies regulatory procedures. drug abuse and mental health services. we became involved in both the audit area and the civil rights examining area. Within the 1982 enactment. several hundred pages of regulations are now down to four or five pages. It basically converted the community health center program from categorical to block grant form. . We proceeded to introduce a series of block grants and to work with the Congress to have nine of those block grants enacted into law. We established the Presidential Task Force. We set up a team which makes sure the money is available when the state program needs it. and ultimately assigns the states the responsibilities that are rightfully theirs. two other block grants concern maternal/child health and primary care. In specific areas such as health care. Four of those nine dealt with health care. Williamson and Carlson involve both White House policy and White House Intergovernmental Affairs activities. federal and state roles needed examining. There we have proposed to expand that block grant very significantly to include black lung clinics and migrant health and family planning programs. the Departments of Health and Human Services. In both of these areas. the block grant program seeks to do just this. block grant now consolidates the five categorical programs that previously covered this territory. The states will then have the opportunity to mix: and match these programs administratively. combine the eight categorical programs into an $84 million national program. Eventually the states will have a fixed amount of money regardless of whether caseloads decline or not. We expect this legislation to go forward and have been mediating between the two departments involved. This working group ensured that federal planning was done from the time the law was passed until the time the states had the opportunity to pick up the program. The two grants that are the same. Some eligibility tightening has occurred. Finally. where the states have had a good deal of experience. Another group continues to pursue regulatory simplification. We reduced 180 pages of HUD regulations on the community development program to seven pages. gaining some more flexibility. Legislation has been submitted for both of these bills at this point. Richard Williamson and his staff in governmental affairs. We also proposed a billion dollar program to give the states more flexibility in adding nutrition and other features to the maternal health block grant. In the Department of Education. Medicaid. Some 318 pages of regulations for the categorical programs in the HHS areas were replaced with six pages of regulations. It observed and dealt with problems that arose by enacting the policy regulation changes. they should be able to make better choices than the federal government in allocating resources among various programs. There is no reason that Medicaid should not have the flexibility to move funds around and to administer the programs in a way that they see fit. It redefines state and federal roles. and Bob Carlson from the Office of Policy Development. and the food stamps program into one major administrative block grant.11 Block Grants and Health Care the regulations as simplified as possible. if our proposals are enacted. The budget will probably be roughly $2 billion— about 95 percent of the 1982 expenditures in that area.

and continue to expand our knowledge base. We hope this dialogue will result in new concepts of roles and responsibilities within the health care system. The second is health promotion and disease prevention. In addition. These are the alcohol and drug abuse block grant. it is our responsibility not to control — or dominate. Still in the early stages. Our way of dealing with health costs is through promotion and prevention activities. We also manage a number of programs: for example. A number of proposals to change the format of those block grants are currently on the Hill: one to include the Women. Infants. renovation and expansion of facilities. which involves a consortium of business. We make certain that there Glenna Crooks is appropriate distribution in numbers of physicians and hospitals. the maternal/ child health grant. In addition we are looking at school health programs and the influence that those programs will have on the behavior of children. we will assist the states in developing a network of leaders. industry. That represents a significant investment and one that we feel is going to pay off. the preventive services block grant and the primary care block grant. and state and local government. a second to combine migrant health. We will encourage and assist states and localities in establishing state or local goals which work to stimulate and support health promotion activities in voluntary and private sector organizations. Our department spends about $3. a program on health education for parents of deaf children and a national health campaign which. for the first time in this country introduced the concept of cumulative health risks. A follow-up to that health style campaign is the healthy mothers/healthy babies campaign. I would like to speak more specifically about our disease prevention and health promotion initiatives.6 billion on prevention.000 requests from individuals for scientific information about smoking. We assist in those areas where there are large groups of underserved persons and where there is an isolated population. We have recently completed work on a set of objectives for the nation in the year 1990 involving some 15 areas of health and have revised and completed the Surgeon General's report on smoking. Planning and Evaluation for the Department ofHealth and Human Services. There are four primary responsibilities ofthe Public Health Service. perhaps our most significant contribution to the reduction of health care cost. We have nutrition monitoring programs and we're developing and monitoring educational programs for the elderly to improve their level of health and quality of life. We fund 156 different community programs currently operating in 54 states and territories and are working on inventories of private sources of funding.12 Block Grants and Health Care Deputy Assistant Secretary ofHealth. We do research on disease prevention and are doing a major survey of personal health practices and the implications of those practices for the future. Other current initiatives of the Public Health Service involve facilitating dialogue among the public and private sectors of the health care system and the people who receive that care. The Department of Health and Human Services is now dealing with four block grants which have been consolidated from 19 categorical programs. Children (WIC) nutrition program in the maternal/child health block grant. The third responsibility is to assist in the delivery of services by providing funds and resources to the states through the block grant program. . The YWCA. are a national campaign against alcohol abuse and an initiative on health education in the workplace. Finally. Former Executive Director of the Southwest Indiana Medical Review Organization. the Urban League and the Red Cross cooperate with us in establishing community-based health programs. Center for Disease Control and the Food and Drug Administration. and that there is appropriate capital available for development. The first is to assist in the development of health knowledge. but to participate with the states and professions in assuring that there are appropriate resources for health services delivery. and third. We also assist in special disasters. to make a number of administrative and management changes to allow the states greater flexibility in the writing of the current primary care block grant. family planning and the black lung program into the primary care block grant. We also operated a technical information center which last year responded to over 30. This includes research programs funded through the National Institute of Health.

I think we should begin by examining some of the faulty assumptions often used to support the imposition of a restrictive drug formulary. however. Opting for a state to employ restrictive drug formulary means sharply restricting the pharmaceuticals a physician can prescribe to Medicaid patients. Unfortunately.13 Quality Health Care and Cost Containment Initiatives Quality Health Care and Cost Containment Initiatives Lieutenant-Governor George Ryan Illinois-Former Speaker of the House. I am particularly concerned by the philosophical and public policy implications of some of the supposed solutions advanced to address this problem. Individual consumers. The solutions are often lumped together under the broad rubric of cost containment. do not support that allegation. Worse. I think all of us here today are deeply concerned with the rising cost of health care services in the country. The claim is that money can be saved by sharply reducing the choice of pharmaceuticals available to Medicaid patients. national health care expenditures amounted to $48 billion—11. Yet they only succeed in contributing to the cost increase spiral. That is bad medical economics. No better example of this phenomenon exists in the area of health care than the advocacy to have states employ a restricted drug formulary for Medicaid patients rather than utilize the open formulary approach. and government at all levels are paying more each year for fewer health services. Such a contention is often made to justify more governmental intrusion to "save money. is whether cost and efficiency of treatment is adversely altered by unnecessary government regulation. many of the solutions proposed are void of a good public policy. it is an approach chosen too often for the wrong reasons and without regard to how its use affects other related health care costs. corporate purchasers of care. The first is that the cost of prescription drugs is rising precipitously.4 Opting for a state to employ restrictive drug formulary means bad medical economics. In 1967. Illinois Legislature. TI24520412 ." The facts. really. At issue. As a legislator. Too many are beguiled into implementing a regulatory policy for containing health care cost. Pharmaceuticals are not major factors in spiraling health costs.

In the same period the price for prescriptions increased by just 40 percent. States with restricted formularies were found to have the highest average per capita drug expenditures per eligible recipient. Farther. Dr. is credited with a landmark study in this area. This assumption is absolutely false. The preferred therapy may speed patient recovery. Hamel's findings. with the exception of Oregon. Thus. In fact. but in that year only 7. The third faulty assumption we encounter all too often is that savings and pharmaceutical expenditures can be achieved through a formulary exclusion of specific drugs or drug classes.7 percent of. Dr. studies across the nation demonstrate just that. What he found was that restricted formulary states. restraining of drug expenditure cost that may be enjoyed following the imposition of a restricted formulary. a systematic review process. In conjunction with this claim. however. Education and Welfare. Between 1968 and 1978. national health care costs rose to $93 billion. What Dr. Albert Thomin of Northeastern University in Boston has conducted studies that reinforce and further substantiate Dr.14 Quality Health Care and Cost Containment Initiatives percent of that amount was spent on pharmaceuticals. Robert Hamel. or other health care expenditures. The one "before and after" study found Mississippi had saved $6. Over the long run. Hamel recognized was that pharmaceuticals interacted positively or negatively with every other phase of health care. In Tennessee. excluded minor tranquilizers from their formulary as a cost control measure. restrictive formulary.800. Dr. Effective cost control is tite property of utilization review not restricted drug formulary.000 during the TI24520413 . for example. In 1977. prices for all commodities increased by 104 percent. the utilization study by the Iowa Department of Social Services found that an open formulary was medically and economically better. reducing the need for hospitalization and additional visits to the physician's office. we are also told that such a policy can be achieved without creating any negative impact on the quality of patient care. Hamel also found that when expenditures for drugs were examined in the closed formulary states there were not always lower costs per recipient than in other states. Hamel's conclusions was that a physician who has unfettered access to his first choice of drug products may render better patient care. His findings replicated Dr. found that an open formulary may contribute to a reduction in the cost of medical and hospital care because of an improvement in the quality of therapy involving the use of drug products. the study of the state's Medicaid program.the total was spent on pharmaceuticals. Thomin's conclusion was that effective cost control is the property of utilization review not restricted drug formulary. Perhaps surprisingly. and an ongoing program to evaluate product deficiency. Dr. but temporary. One of Dr. which consisted of a relatively open formulary. Hamel's: restrictive formularies tended to cost more than other programs. Mississippi. Medicaid beneficiaries had incurred out of pocket expenditures of $73. Dr. Thomin separated state vendor drug programs into three categories: formulary restrictives. However. and a totally open formulary. Dr. But his findings do not stand alone. spent more per capita than neighboring states which imposed no restrictions. He then calculated the average per capita expenditure for each program. I would contend that this erroneous assumption derives from an immediate. Thomin also studied the effects of restricted drug formularies on per capita medical expenditures and found no difference between the categories. He examined the records of nine Southern and Western states using data supplied by the federal Department of Health. The second false assumption is that a restricted or closed formulary will reduce overall Medicaid program cost. total Medicaid cost will be higher with restrictive formularies. of the University of Wisconsin.

Dennis Heffher of the University of California. The report concluded that controls over price and availability of drug are not necessarily the best means of controlling expenditures.1 million but program cost increased $15. Texas experienced an increase in total health expenditures of $4. Texas is an open formulary state whereas California is a restrictive one. Also. As a follow up to this study. Hospitalizations increased 34 percent and the average length of stay increased 10. It is wise. however. Of course. Louisiana eliminated seven categories of drugs. For every dollar saved in drug cost. conducted a study in 1979 of the Louisiana Medicaid program. The study showed that for the entire program. The elimination of prescribed drugs ignores.3 percent. the use of lesser quality or inappropriate drugs can impact on the patients9 treatment. the increase was $23.Quality Health Care and Cost Containment Initiatives 15 When the physician's drug offirst choice is not permitted. however.69. Dr. A more financially viable approach may be through efficient utilization management.7 percent. total expenditures increased 7. Non-prescription services rose $3. This was the only program change during the time span that the study was underway.08. the Louisiana program was then compared to the Texas program for the same time period to examine whether or not Louisiana's experience was unique or represented a general Medicaid trend.11 per recipient in Texas. When the physician's drug of first choice is not permitted. Louisiana experienced an increase of $4. the elimination of prescription pharmaceuticals from a Medicaid formulary reduces or.60 on other health care costs. California restricts both price and availability. it was estimated that California would have saved over $30 million from 1975 to 1978 on total program eligibles. In lexas. Heffner's preliminary hypothesis was that the imposition of a restrictive formulary would reduce or contain total health care expenditures. and in relation to a program's goals and objectives. however. I want to emphasize several points. they concluded. experienced the decline of 6. more correctly. But as in any other area. utilization management is used to help control expenditures. A large portion of the expenditure increase in Louisiana resulted from increased hospitalization of the elderly and disabled.4 percent in hospitalizations during the same period. He then compared the Louisiana program to that of Texas. However. but few restraints are placed on the price and availability ofdrugs. Cost containment in health care services is a goal that I have always supported.00 for each Louisiana recipient. Dr. the estimate was a savings of $50 million. Texas.1 million. Based on the findings. In conclusion. his findings did not match what he deduced would happen. Two comparative studies involving lexas and California provide additional proof that this assumption is wrong. eliminates the opportunity for overutilization. the effect on the quality of care and Medicaid program expenditures. perhaps hindering recovery or requiring a more extensive treatment alternative. perhaps hindering recovery or requiring a more extensive treatment alternative. prescription drug expenditures decreased $4. while non-prescription services rose $30. same period. The fourth and last of the faulty assumptions I'd like to lay to rest today holds that the use of a restrictive formulary will control over-utilization of different medications within the same general therapeutic class. The study projected what would happen to expenditures in California had the Texas method been in use. When the projections were expanded to total program recipients. the use of lesser quality or inappropriate drugs can impact on the patients* treatment. In 1977. including an entire class of minor tranquilizers. for Louisiana. I believe cost containment should be achieved in terms of a program's total cost. to keep an open mind to the possibility that the use of some controls may actually turn out to be counterproductive by adding more in administrative cost than can be saved through efficiency. For the study period. a restrictive formulary TI24520414 .4 percent. And what actually happened was that prescription expenditures decreased 11.

Member. At my insistence. the substitution of more intensive and expensive forms of care will probably result. nine months after capitation was established in 32 of Iowa's 99 counties.000. for example. In Iowa. there are no intrinsic benefits to be gained by a restrictive formulary. from the graduate program in health administration. If optimal pharmaceutical treatment is unavailable due to program restrictions. Labor and Industrial Committee. In the preliminary report. Based. pharmacists are paid up front based on the number of patients and regardless of the number of prescriptions. One major assumption about capitation was that it would reduce administrative costs. I would like to speak this morning on capitation— something I fell into literally by constituent request. Senator Calvin Huttman Iowa— State Senate Majority Leader. Nine months after capitation was established in 32 of Iowa's 99 counties. a doctor from the graduate school in the University Center of New York. And that. The facts support an open formulary. the vice president of the National Pharmaceutical Council. than because an open formulary makes good sense economically in terms of total program cost.D. as we know. Rules and Administrative Committee. will markedly increase costs. if for no other reason. There were three pharmacies in one and five in the other.160 for expansion of the capitation study. When one carefully examines this issue of open versus closed formularies on the basis of rational criteria there are no intrinsic benefits to be gained by adoption of a restrictive formulary. the executive director of the New York State Health Planning Commission. it was shut down with drastic administrative problems. Minnesota. It was originally estimated that the state would save more than a million dollars over the year. Member. Chairman. the Department of Social Services and the Commissioner of Social Services established an independent review of the drug capitation program in Iowa. . if for no other reason. Thus. another independent pharmacist. The facts support an open formulary. Department of Pharmaceutical and Physiological Science. on the unavailability of his first choice of drug. This group included Belair Pharmacy from White Bear Lake. University of Chicago. an assistant professor. a Ph. capitation appeared to be successful in the two counties. it was shut down with drastic administrative problems. However. Let me explain quickly what capitation is and go through how it was established in Iowa. a doctor may admit his patient to a hospital in order to provide the treatment he desires. But the administrative costs of the program were completely underestimated: in nine months the program exceeded its estimated administrative costs by $300. two counties were chosen for the capitation experiment by Medicaid. than because it makes good sense economically* unnecessarily and ill-advisedly invades the doctor-patient relationship.16 Quality Health Care and Cost Containment fnitiatioes When one carefully examines this issue of open versus dosed formularies. so the University of Iowa Health Services Research Center applied for federal funds and received $775. Appropriations Committee. Capitation involves advanced payment to pharmacists based on the number and type of patients who have registered with them.

various offers like free toothpaste or vitamins for a year will spring up. The fact that it ran for under a year and therefore provided little information about long term problems. However. administrative techniques and cost containment.17 Quality Health Care and Cost Containment Initiatives By the time theprogram has reached its third and fourth years. the savings in one year become the capitation floor for the next year. the quality of care cannot help but decline. what prevents the state from setting 80 percent of $64 as the new advanced payment fee? Finally. but the amount of leakage. and. For these pharmacists capitation could create an unfavorable risk situation once the hold harmless clause is dropped. For instance. which I have just discussed. Welfare patients and people on Medicaid will be transferred out of the program* Under a capitation program. And if he is able to do it. As cost savings are achieved under capitation. the program did not closely investigate consumer reaction to being "locked-into" one pharmacy. Because customers can only go to one pharmacy. that is. an associate professor of Health Planning from Pennsylvania State University. the program did not show how many pharmacists had Medicaid revenues which were disproportionate to their total revenue. pharmacists who participated in the program had a "harmless clause/' which ensured they would receive payments at least equal to what they would have received had they remained on a fee-for-service basis. Under a capitation program. In conclusion. But if he shows that he can keep costs at $80. the pharmacist had to spend time and effort which was not clearly compensated by the capitation rates. Also. by the time the program has reached its third and fourth years. Another danger to pharmacists is the possibility of payment fees undergoing a ratchet effect. . Now the pharmacist has to keep costs within $64. there has also got to be a terrific amount of antagonism between the pharmacies produced by the race to sign up customers. the sum remaining in the escrow was to be split between the pharmacies and the state. Also. the program assumed that pharmacists would reduce prescription costs through the use of generic substitution and by reducing the prescriptions' quantities. On the other hand. in the first year the pharmacist receives 80 percent of $100 up front. But to do this. Welfare patients and people on Medicaid will be transferred out of theprogram because pharmacists will not want to trade dollars with the state and will try to eliminate those people from their rosters. purchases outside of the capitation program. This group reviewed the program— its functions. the hold harmless clause protected the pharmacies from encountering any real risk. the state may turn around and set a new payment fee at $80 and give the pharmacist only 80 percent of that up front. the ratchet effect will dry up any benefits for pharmacists. and the head of the Pharmacy School at Minnesota. that it was backed by the University of Iowa. At the end of the year. the ratchet effect will dry up any benefits for pharmacists. The shortcomings of Iowa's program were the administrative costs. so the economic danger of capitation for pharmacies is still unknown. the quality of care cannot help but decline. For instance. thereby providing the pharmacies with an incentive for cost savings. pharmacists were prepaid 80 percent of the estimated fee for filling prescriptions. actual savings. During the project's nine months. indicates that consumers had low tolerance for it. The remaining 20 percent was set aside in an escrow account against emergency and supplemental payments. They will then go to doctors and try to get the prescription lessened and get into the so-called "bath tub generics" and lessen the quality of the drug. And that actually happened in Iowa last March when the program started.

Member. Assistant Chief. What about the empty beds that already exist in a lot of our communities? Veterans can be cared for at local hospitals with a simple little photo identification card. We spent a quarter of a billion dollars to determine eligibility—part of regulations. But all we need is a signed form to qualify for eligibility. . skilled nursing facilities and convalescent hospitals. We have a surplus of hospital beds for acute care hospitals. hospitals are concerned about losing their acute care status. or if you have to go to a photocopy machine. Consider the regulation concerning hospital beds. Department of Ophthalmology. And then there is the regulation that says that a skilled nursing facility or a convalescent hospital can only charge so many dollars. The form costs 10 cents. They fly in. And the teaching that takes place at VA hospitals can be moved to other facilities. The current head of the VA finally stuck his neck out and said. Why spend a quarter of a billion dollars to try? Multiply that by 10 nationwide and there is even greater waste. Tbday there is a surplus of doctors: some feel that this surplus is responsible for escalating costs in health care. it cannot be used for an acute care bed. and twice with heavy health care costs in the private sector. the cost is 1 cent. So we pay for Medicaid twice. once with heavy tax dollars. The person would sign with a perjury penalty if incorrect. But those in the state legislatures have to help. we limit the number of beds and charge the private patients more. There is nothing to account for the entire Veterans Administration system. In California it is $39 a day. In California it is $39 a day. Vice Chairman. We're not going to catch that type of fraud anyway. too much government regulation. The only people who are ineligible and who are thrown out are the honest ones who admit to having a part-time job or money in the bank. Assembly Committee on Health. ML Zion Medical Center. Associate Clinical Professor. more of us now know that it is the fault of. California—Chairman. go for eligibility. former senator from California. San Francisco. let me give you some examples of what Jerry Brown. the reason that we can't control costs. Issue a picture plastic card. get their prescriptions. However. And then there is the regulation that says that a skilled nursing facility or a convalescent hospital can only charge so many dollars. Well. if we do. It takes $55 a day to make ends meet The result is that we don't take MediCal patients. instead. Once that bed is used in intermediate care. Some of the patients live in Hawaii and come to California for care because they like the doctors there. and fly back to Hawaii. Bob Nemo. said we need better health care for our veterans although we have fewer dollars. Assembly Committee on Business and Professions. we limit the number of beds and charge the private patients more. So we pay for Medicaid twice. and twice with heavy health care costs in the private sector. if we do. University of California at San Francisco. One regulation now beginning to be ignored states that you cannot use an acute care bed for a different level of care. and there is no more fraud than there is now. Physicians are being told that we can't control costs. once with heavy tax dollars. I want to talk about government regulations. Member. M. "Maybe we shouldn't build another hospital here because the ones we have are half empty" Somebody is beginning to look. Assembly Committee on Housing and Community Development. Clearly.D. is the same reason there are too many hospital beds. The result is that we don't take MediCal Quality Health Care and Cost Containment Initiatives Assemblyman William Filante. receive their care. l b illustrate my point. or Teddy Kennedy want—more regulations. It takes $55 a day to make ends meet. Assembly Committee on Aging.

We don't need to limit benefits. benefits to the recipients. In California we are willing to do it. who are willing to do it.19 Quality Health Care and Cost Containment initiatives Hospital utilization was going up last year in all of California. Hospital utilization was going up last year in all of California. In California we have contracted at a local level for the last nine years. Can we contract out and cut benefits? Yes. The county hospital went from 100 percent compensation to 60 percent to 50 percent and the private or community hospitals followed suit. With increased hospitalization use we are going to have concurrent utilization review. If we contract out we use capitation for the entire program. But the community hospitals couldn't take care of all the patients. the AFDC mother is a single parent with two children at home. The patient is moved to a lower level of intensity of care whenever possible. we have my proposal for the entire program and another proposal just for AFDC. When that happens. In California. and not try to do it in compartments. For example. It's called incentives. The county couldn't make ends meet and the legislature returned the compensation to 100 percent. Multiply the California figures by 10 and that's the approximate savings. She will make do and get some help from her family and friends. The option for what we are recommending today is to contract out the entire process. Let's cut the 10 percent the 20 percent or more. it goes down because the number of patients sitting* in the acute care hospitals due to the administrative maze lessens.000 and in eight months saved over $1 million. Capsjust don't work without the incentives and the contract systems. the elderly or the blind. and putting the money on the back of the providers. But the next morning I give her a bill for $100. and long-term facilities. Raise the rates for certain things— possibly drugs. We need incentives for the recipients. the cost of the program doesn't go up. not just drugs. Here is what happens. For example if long-term and hospital rates are compartmentalized and one is contracted there isn't that trade-off that would happen if the whole program was contracted out. AFDC is easy because it involves working age people. We don't want to cut services or hurt the poor. Under our pilot program we have included more home care than is available in the rest of the state. We could save yearly without cutting benefit rates to our providers. It doesn't work. TI24520418 . not the elderly. They invested $36. One of the proposals is to give the AFDC mother the same benefits at home that she would get if she went to work. Now the cost is higher and patients are receiving worse care under the county. Caps just don't work without the incentives and the contract systems. simply by getting the government out of the business. a single mother who's just given birth has two kids at home in an unpleasant environment." where the cheapest supplier or one that gives out toothpaste is used. we see a significant cost saving without a corresponding change in the system. They put a rate cap on it which only cost more money. The second reason to contract out. She will take the bill and go home. We save approximately $100 million. They put a rate cap on it which only cost more money. If we multiply the $1150 million statewide saving by 10 for the nation. That's not being cruel. We do want to cut costs and waste. so many went back to the county. She'd like to stay in the hospital a couple of more days. Contracting out works better than what is termed the "prudent purchaser. Her health benefits cost twice as much as the single mother who is working for the state and is getting our health care benefits. That's allowed under Medicaid. and without cutting the eligibility. We found that it actually costs less to give care when under contract because the providers are at risk. For example. is flexibility. that's letting her make the decision at the marketplace.

80. and Government Committee. this shouli prove that some of the concepts attempted in Arizona will be beneficial to othe states as well. We are hopeful that by mid-June the researcl and development phase of a three-year pilot project will be funded by the federa government. We also waived nursing care facilities. they are locked in. It is now tentatively waivec for the state of Arizona. Arizona counties cannot raise the tax money to combat the increased cost in health care. Arizona had to apply fo certain waivers in order to be excluded from taking the government . but in a separate risk pool." While segments of family planning certainly can be designated as acutt care. Member. We made our decision on the basis of what we call "acut< care. We anticipate that independent physicians associations and othei organizations will form to supply industrial employers with competitive proposals that will enable them to send their employees to this capitated system. We also said that since the state of Arizona continues to pay between a 20 percent and 30 percent increase foi state employees in health insurance. with the help of the House. I believe the best part of this whole program is that the federal government agreed that it would capitate us for its payment system. We waived home health care and tentatively had it approved. his care is not perceived as medically necessary or acute. we put together a program called the Arizona Health Care Cos Containment System (AHCCS). 38 percent of health care costs are expanded on long-term nursing home care. AHCCS is the firs program to use capitation for physicians as a way to hold down costs. The nex waiver was a problem politically—family planning. Not all doctors are entirely happy with this program primaril. If a patient does not enter through a primary can physician. AHCCS is the first program to use capitation for physicians as a way to hold down costs. because we have capitated the whole program on a bid basis. . Education Committee. It would prepay us based on 95 percent of what a fee-for-service equivalent system in a Medicaid state would get paid. They do not all nee< to be maintained as skilled bed care. health care is delivered by fourteen counties to participants. People who work in operations which employ 25 or fewer peoph and who cannot buy competitive health care insurance can enter this program They must pay the full cost of it. Senate. we passed an ancillary bill whicl allows the counties to designate the beds any way they like.s money witl its accompanying rules. and Aging Committee. We also made prepayment capitation contracts with a lock-in clause available to other groups. This program is voluntary for the indigent ant medical needy.20 Quality Health Care and Cost Containment Initiatives Senator Robert Usdane Arizona State Senate. If successful. In the state of Arizona. What was waived? Skilled nurs ing care is an example. they must enter through an awarded bidder on a prepaic capitated basis. Constitutionally. and the counties of Arizona. In an Arizona alternative to Medicaid. l b obtain approval from the federal government. Appropriations Committee. but they can enter. Chairman. however. the whole process cannot. the state and county employees can entei this program. It most states. once they enter. the state. Major industry may also enter thb program. Welfare. And. regulations and controls. For example we had nurse midwifery waived.

The private sector needs our help at the state and federal levels. They have no market research on what that's going to cost. Still unsettled. it received strong criticism from many business interests. Yet. We cannot afford to have the private sector bear the burden fully for the care of our elderly. We've go1 to start doing some thinking on our own. Private sector initiatives to solve health care problems are more complex than we sometimes imagine. Regent Emeritus. which may yet have e chance to work. with catastrophic provisions and some supplemental benefits over and above Medicare. At present. When the administration proposed a ceiling on the tax deductability of private sector insurance. in that they cannot han die such items as catastrophic illness without violating present anti-trust laws. Thus. A major problem of the current situation is that Dr. And all of us who are concerned about health care must give that help. there are several major corporations which only in the past year have given their employees health insurance for life. the Medicare trust fund keeps losing $12. what is to be done? Who in the private sector would want to assume th< burden of paying the difference if a ceiling were appliec to tax deductability? The patient. I think we must wonder if the private sector is being asked to take on a burden which it may not yet be able to assume. helped by tax write-offs for both employers and employees. The People-toPeople Health Foundation. Because of this common arrangement. TI24520420 . Georgetown University. President and Medical Director.400 a minute and will continue to lose it.21 Private Sector Alternatives Private Sector Alternatives: The Answer t o Health Care Problems Founder and Director ofProject HOPE. William Walsh private companies would rather deal with one carriei for the sake of simplicity. the premiums for certaii items remain too high for many. and we know that this tendency will continue. instead o\ condemning new federalism. The only way to discourage that is to stop allowing tax breaks. But what is not going to work is oui permitting private sector industry to constantly extend health care benefits. the government does without $28 billion a year in revenues. and once it's given. Yet. The variance in actual case: creates a problem for insurers. the company.. While I am in favor of such solutions. Inc. We cannot let them continue to avoid competition because it's administrative!} easier. The population is getting older. So. the phy sician? Why shouldn't the hospital system be willing t( take on prospective reimbursement and go at risk? Wh) should we ask the insurance companies and the majoi corporations to police our behavior? We know that we have problems facing us. then. is the question of the fairness of allowing tax write-ofTs to many while 25 million Americans pay after taxes for their health insurance. much of American business buys health insurance for employees. it needs more deregulation and relief from anti-trust constrictions. it will never be taken away.

President of Government Research Corporation N. including Medicare and Medicaid. as we now have it. These are the open-ended tax subsidies and pay-asyou-go retrospective reimbursement policies fostered by third party payers. I will credit the Reagan administration for beginning to tackle the third problem. The desire to rebuild our defenses. This realization has caused the federal government to try to save money in its non-defense programs. the participant gets credit when he leaves the system. Director of Human Resources Studies. not with mine. Third. with technological improvements and with the quality of care that all of us want. Assistant Director of Wage and Price Monitoring. reimbursement policy and regulatory policy. Yet the solutions offered by the government have not seriously addressed those causes. Some imagined changes would involve fundamental redesign of the benefit structure under Medicare to take care of some inexcusable inequities. as long as the fundamental forces driving cost increases are still there. The problem we face in health care today is the lack of an effective mechanism for sorting out the waste component from those portions of the spending increases associated with an aging population.. We got into this mess because the sources of financing continued government spending on health care and other social problem areas are drying up. In closing.A. in order to protect people. I want to consider three issues regarding health care costs: what the problems are. I can devise ways to hold down costs. I find promising some plans which offer rebates to employees who economize on the use of the system. what are the impediments that might lie between the problems and the solutions. Less promising. we are saying that we are willing to subsidize your health care up to a point. but not without jeopardizing quality. Former Director of Regional Operations and Health Affairs for the Health and Retirement Fund for the United Mine Workers. My concern is that the way the government defines the problem systematically subordinates considerations of quality and availability of care to considerations of cost. Or. regulations are strangling the system. as well as with business people and labor. Perhaps we would want to encourage rebates also. escalation costs lag behind as an Steve Caulfield . This is forcing us to realize that we are no longer going to be able to fulfill the kind of social contract that we have signed with our elderly. American Enterprise Institute. Former member of the Council on Wage and Price Stability. with our farmers and with our veterans. In a labor-intensive industry like health care. puts a squeeze on programs like Medicare and Medicaid. In essence. Self-insurance is growing in the market to the point where some estimate that it is now 20 percent.22 Private Sector Alternatives Resident Fellow. I think that until we begin to do that. starting on the 60th day of hospitalization? It will be very politically unpopular. in other proposals. Authored Health Care Costs: Private Initiatives for Government. are the coalitions and the wellness programs. you pay the difference with your dollars. I favor multiple choice that is encouraged by fixed dollar employer contributions to the plan of choice. but it is being tried in Florida. regulations. Director of the Center for Health Policy Research. instead of having cost sharing. Who wants Jack Meyer to tell Medicare people they are going to have to ante up a little bit more for routine costs. I want to tick off some things that show some promise in the private sector. But that may mean a Pinto or an Oldsmobile but not a Cadillac. we'll just be trying to put a lid on a cauldron without turning down the heat. seem to be at the heart of the problem. Many of the private sector initiatives will only make marginal contributions to a deceleration of cost increases. get inflation under control and lower interest rates by controlling deficits. and beginning to open up some possibilities in the regulation area for more flexibility by the states. but intriguing. volume and intensity. Expenditures are a function of three variants— price. I find preferred provider selection controversial. where the solutions might be. Three forces—tax policy. If you want the Cadillac.

They're saving piles of small bucks and I think that's an important place to begin.2 percent increase in terms of total admissions and in terms of total patient days. We're going to have to replace or substantially renovate. It is now 0. I think the biggest impediment is what I have been writing about and speaking about over the last year. but also absorb a higher percentage for Medicare and Medicaid. The question of intensity is perhaps the most disturbing news. Effective cost containment will probably involve some kind of effective rationing. it will be 81 percent. We have taken an extensive look at private sector initiatives. For example. We would hope that any system of rationing would acknowledge and maintain the diverse and pluralistic nature of our health system. we had an annualized 12 percent rate of inflation in the health care industry. TI24520422 . Against the 12 percent inflation in the medical care industry in March. somewhere between 40 percent and 50 percent of our hospital stock. and at the same time discouraging inappropriate and excessive utilization. When we compound the problems of the changing demographics. when for the first time in 17 years. It means that the privately-insured patient will pay more. the issue of rationing becomes a central but often unstated theme. Who's going to bear the cost and what are those costs of capital going to do to fuel the engine of rising health care costs? On the volume side of health care. the rising rates of admissions and length of stay of Medicare patients with the current proposal for budget cuts in Medicare. The Washington Business Group on Health has a list of 300 approaches. my comments about the solutions. What is making me very nervous is that it is rising much more significantly in the over 65 population. In 1989. with the considerable growth in ancillaries—labs. Last month's economic indicators on health care costs suggest that there has been a decline in the increase of admissions and a decline in the increase of patient days. it does not mean that there will be fewer dollars in the system. One solution. John Deere and other companies around the country are working on the margins of the problem and working on them successfully.23 Private Sector Alternatives economic indicator of the general Consumer Price Index (CPI). Caterpillar.9 percent for 1981. allowing those who need care to obtain it without suffering adverse consequences. which may be unpopular. in this decade. the curves are flattening. cost shifting between the public and private sectors is around $5 billion this year. we better look at the rising cost of ancillaries as a place to begin. the rest of the country had a negative CPI. we had a decline in CPI in this country. pathology. If we're going to get into cost containment. is if we cannot afford the best. a 1. In 1968. radiology. So we are still on the crest of the rising health care costs that are labor induced. Now. which I call cost shifting. There is now ample evidence that at both the micro-economic and the macro-economic level. etc. let us at least afford with dignity what we can afford. Now I question whether that is an appropriate kind of situation to put the private sector in when it is trying to cut back costs. the ratio of death to capital expenditures in the hospital industry was 40 percent. As we examine the questions of cost containment and health care. A tremendous explosion in capital costs is about to occur. in the month ofMarch. There is a litany of creative approaches. The third point is the impediments. The private sector will not only have to absorb its 12 percent. perhaps higher.

from which comes heroin. and the poppy. in order to have an effect on the amount of drugs coming into this country. education and prevention. We are targeting three narcotic plants — the cannabis plant. Our research and development activities are now directed to longitudinal and epidemiological studies For many years we concentrated on physical rather thar psychological addiction. for example. military radar information can be relayed to civilian enforcement personnel. Dr. We are also seeking mandatory minimums for drug dealers. law enforcement. the crime rate in Miami is down 43 percent. The National Federa tion of Parents for a Drug Free Youth (NFPDFY) cat TI24520423 . The average age of first drug use is 13. The second area is enforcement initiatives. Whj does one person become addicted to a drug when anothei may not? Why will one type of treatment work anc another fail? We are also giving priority to those research areas concerning antidotes that will block the action of a drug and thereby help detoxify addicts. since. detoxification and treatment. We hope to reduce the number of days a patient would go to the clinic by using new chemicals and medi cines. In that area we are placing a great deal of emphasis on stopping aircraft and ships coming from South America. the cocoa bush (the source of cocaine). Carlton liirner And we hope for even better results in the future. For the first time we have been permitted to share military information with foreign enforcement officers. I will address the issue of drug abuse and I will give an overview of where we are and what we are going to do in the Drug Abuse Policy Office. and the research done on adults is not necessarily applicable to the young. NATUS. is coming back to block grants We are examining the methadone maintenance program. way to reduce the cost of health care is through prevention.000 youngsters a year needing residential treatment care and that is very expensive. which brings me tc the detoxification and treatment program. Tbday the focus is on health care in the states. One -*. research and development. is of vita importance. will be very successful.24 Coalitions to Combat Drug Abuse Coalitions to Combat Drug Abuse White House Director of the Drug Abuse Policy Office. in tandem with a ven strong enforcement policy. We believe that the only way to deal sue cessfully with drug abuse is to prevent it. As a result of our efforts. In the international area. education and prevention. Since we determined that 80 percent of all drugs entering this country come in through Florida. We are emphasizing research into drug abuse and brair biology and are trying to answer certain questions. We have 60. to be filed through the NDA chain shortly. We simply cannot afford t» keep working in rehabilitation. but this must now change. The treat ment program. in which the average cost per person is about $16 per day. This has proven invaluable. we are operating the Vice President's task force in Florida and have four Coast Guard cutters out patrolling key sealanes for drug smugglers. we must stop the drugs at the source. since no bail seems high enough to hold these people. What we have at this point is a five-pronged program: international initiatives. In this we are receiving excellent cooperation from several South American governments. These will allow us to increase the number of people that wt can handle in treatment facilities and at a reduced cost The fifth prong. We are under taking a long-term education and prevention progran geared to reduce the desire of our young people to ust drugs. Jill Gerstenfield Vice-President and State Legislative Chairman of the National Federation of Parents for Drug Free Youth. We hope that this program.

help turn this tide through volunteer work. By 1980 the NFPDFY found that 15 million teenagers smoked marijuana daily. We saw statistics like these: 65 percent of high school seniors surveyed reported using illicit drugs at some time; 60 percent reported using marijuana at some time; 49 percent reported using marijuana in the past year; 34 percent reported using marijuana in the past month. Parents felt helpless at first but then began organizing and educating themselves. First, they wanted to find out what marijuana is and why it is appealing. They examined the health hazards associated with marijuana. Reproductive damage seemed probable. Tests done on animals, primarily on monkeys, showed that the sperm of males was either abnormal or de-' creased in number. Once the male stopped smoking, his sperm count seemed to return to normal. For women, the data seemed even more frightening. Female monkeys were fed the equivalent of two joints a day. Of the offspring produced, 40 percent were damaged. They also looked at brain damage, since marijuana adheres to brain tissue. What they saw was A-motivation syndrome, kids with no ambition or normal goals. If the entire period of adolescence is lost because of drug use, what results is an adult who has not learned to deal with successes and failures, disappointments, and all the other things we learn to cope with in our adolescence. Over the years the number of parent peer groups has increased. When the criminal code was about to be revised to decriminalize possession of up to five ounces of marijuana, parents were understandably distraught. Senator Mathias held a hearing at which the NFPDFY was formed. Due in part to the efforts of our group, the criminal code was not revised. We became involved in a successful campaign in favor of localgovernment banning drug paraphernalia. And we have worked against look-alike pills, counterfeit pills designed to look like real uppers and downers. We have a small office in Silver Spring, Maryland, with a staff of only four people, yet our presence is felt in state legislatures and in Congress. We are made up of liberals and conservatives and have every ethnic and racial background represented in our membership. With the support of the present administration, we now feel that we have a full program. And now, for the first time, we are seeing a decrease in drug use.


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federal government officials.The American Legislative Exchange Council has once again demonstrated its valuable contribution to national policymaking by taking the lead in addressing the issues of critical importance to every American. and private sector health care experts. Richard S. Ronald Reagan Let me assure you of my interest in your work. Schweiker Secretary Department of Health and Human Services . ALEC's Health Care and the States Conference provides a unique and timely forum for an exchange of ideas between state legislative leaders. I am pleased that you are addressing issues that are of critical significance to our nation's health policies.

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