Integrating Medicare and Medicaid Services Through Managed Care

Integrating Medicare and Medicaid Services
Through Managed Care
Updated January 18, 2007
Julie Stone and Karen Tritz
Specialists in Social Legislation
Domestic Social Policy Division

Integrating Medicare and Medicaid Services
Through Managed Care
This report discusses efforts to improve the delivery of health and long-term
care services for individuals who are dually enrolled in Medicaid and Medicare (i.e.,
dual eligibles), which generally includes the elderly and some individuals with
disabilities. Dual eligibles are more likely than other Medicare beneficiaries to be
in fair or poor health, cognitively and/or functionally impaired, and have more
chronic ailments and conditions. The Medicaid and Medicare programs that provide
services to dual eligibles are administered by different units of government, guided
by different laws and regulations, and cover a different set of services for these
individuals. These differences can lead to fragmentation and inefficiencies.
Some federal and state policymakers have tried to address these challenges and
develop a coordinated and/or integrated approach to delivering Medicare and
Medicaid services through managed care. The Program of All-inclusive Care for the
Elderly (PACE), as well as state programs in Arizona, Massachusetts, Minnesota,
New York, Texas, and Wisconsin, are some of the managed care programs discussed
in this report.
Recently, the Medicare Modernization Act (P.L. 108-173) established the
Medicare Special Needs Plan (SNP) option, which was intended to improve care
coordination and service delivery for certain groups of Medicare beneficiaries.
Under the SNP option, Medicare managed care plans are allowed to limit enrollment
to certain types of beneficiaries such as dual eligibles. SNP plans may choose to
better coordinate the care of dual eligibles by contracting with the state Medicaid
agency to also provide Medicaid services, but SNP plans are not required to do so.
It is too soon to tell the extent to which the new SNP option will actually increase
participation in integrated Medicare/Medicaid managed care plans.
There are a variety of challenges in developing, enacting, and implementing
integrated Medicare and Medicaid programs. The specific circumstances will vary
by state, but some of the challenges have included reconciling conflicting operational
requirements between Medicaid and Medicare, ensuring sufficient experience of
managed care plans with the needs of dual eligibles, and addressing provider and
beneficiary resistance to managed care. These and other challenges are discussed in
this report.
Finally, this report describes policy considerations and legislation that have been
introduced in this area during the last several sessions of Congress. Recent interest
in integrated managed care suggests that the 110th Congress may consider expanding
these plans to promote more efficient and cost-effective delivery of health care for
dual eligibles. This report will be updated to reflect significant policy or
programmatic changes at the national level.

In troduction ......................................................1
Rationale for Integration Through Managed Care.........................4
Types of Integration and Federal Authority..............................6
Background on Managed Care for Dual Eligibles.........................8
Selecting Managed Care Plans and Setting Payment Rates
Under Medicaid and Medicare...............................10
Medicare Special Needs Plans and Passive Enrollment...................11
Summary of Medicare/Medicaid Integration Projects.....................12
Program of All-Inclusive Care for the Elderly (PACE)................12
State Integration Programs......................................14
Arizona Health Care Cost-Containment System (AHCCCS).......14
Massachusetts Senior Care Options...........................15
Minnesota Senior Health Options (MSHO)
and Disability Health Options (MnDHO)..................15
New York Medicaid Advantage Program......................16
Texas Star+Plus..........................................16
Washington Medicare/Medicaid Integration Program.............17
Wisconsin Partnership Program..............................17
Other Activities..............................................17
Results of Integration Projects.......................................18
Challenges in Developing Medicare/Medicaid Integration Projects..........19
Level of State Investment and Expected Returns on Investment.........19
Conflicting Medicare and Medicaid Requirements...................20
Managed Care Payment Rates...................................21
Federal Waiver Approval.......................................21
Willingness of Medicare Advantage Plan to Contract
with the State Medicaid Agency .............................22
Ability of Medicaid Long-Term Care Providers
to Meet Managed Care Requirements, and
Cover Acute and Primary Services...........................22
Provider Issues...............................................23
Upper Payment Limit Policies and Managed Care...............23
Other Provider Concerns...................................24
Attractiveness of Managed Care to Beneficiaries....................25
Policy Considerations for Congress...................................25
Legislation ..................................................26

Appendix. States With Legislative Action to Consider
or Enact an Integrated Medicare/Medicaid Program..................28
California ...................................................28
Florida .....................................................28
Maryland ...................................................28
List of Figures
Figure 1. Medicaid Managed Care Enrollment
of Beneficiaries by Dual Eligible Status, FY2003.....................9
List of Tables
Table 1. A Comparison of Coverage Under Medicare
and Medicaid for Selected Service Types...........................2

Integrating Medicare and Medicaid Services
Through Managed Care
This report discusses efforts to improve the delivery of health and long-term
care services for nearly 7 million individuals nationwide who are enrolled in both1
Medicare and Medicaid, known as dual eligibles. There are several subcategories
of dual eligibles. Although all duals receive Medicare-covered services, some
receive full Medicaid benefits and others receive only assistance with Medicare cost-
sharing. This report is focused on those dual eligibles who receive both Medicare
benefits and the full range of Medicaid benefits offered in their state.
Dual eligible beneficiaries are generally elderly or have significant disabilities,
and are more likely than other Medicare beneficiaries to be in fair or poor health,
cognitively and/or functionally impaired, and have more chronic ailments and
conditions. Dual eligibles also use a disproportionate share of Medicare and
Medicaid services. In 2002 (the most recent data available), dual eligibles accounted
for 16% of Medicare beneficiaries, and 22% of Medicare spending.2 For Medicaid,
based on FY2003 data, dual eligibles comprised 13% of Medicaid beneficiaries, and

41% of Medicaid expenditures.3

The Medicare and Medicaid programs are administered by different units of
government, guided by different laws and regulations, and cover a different set of
services, which can lead to fragmentation, confusion, and inefficiencies in the
delivery of services for dual eligibles. Medicare is federally administered by the
Centers for Medicare and Medicaid Services (CMS). Medicare generally covers
primary and acute care services (e.g., physician, hospital) and a limited set of long-
term care services (e.g., post-acute, short-term stays in skilled nursing facilities and
post-acute home health care services). Starting January 1, 2006, Medicare also began
offering a voluntary prescription drug coverage under a new Part D benefit. Dual
eligibles were required to switch from Medicaid to the new Part D benefit to receive
their prescription drugs.4

1 CRS analysis of CMS, Medicaid Statistical Information System (MSIS) State Summary
DataMart, Apr. 4, 2006.
2 [
3 Additional information is available in CRS Report RL32977, Dual Eligibles: A Review of
Medicaid’s Role in Providing Services and Assistance, by Karen Tritz.
4 For additional information, see CRS Report RS21837, Implications of the Medicare

Medicaid is a means-tested program, administered by each state within broad
federal guidelines. Medicaid benefits include primary and acute medical services,
as well as long-term care service. Within broad federal guidelines, each state may
define its own package of covered medical services, resulting in considerable
variation in the types of services covered across states. In addition to choosing
whether a service is covered, states may also limit the amount, duration, or scope of
a service, meaning that they can limit the number of hours, days, or type of coverage
for a particular service. For example, a state may specify that payment for inpatient
hospital services cannot exceed 40 days of coverage in a 12-month period.5
For dual eligibles, if a service is covered by Medicare and Medicaid, Medicare
is the primary payer; Medicaid pays for services above and beyond what Medicare
covers (referred to as wrap-around coverage). Medicaid may also cover some
beneficiary cost-sharing associated with particular Medicare services. For Medicaid
benefits that are not covered by Medicare, such as certain long-term care services,
Medicaid covers the cost of these benefits unless there is another liable third-party
payer. Medicaid is generally the payer of last resort. Table 1 below briefly describes
various Medicare and Medicaid services that may be covered for dual eligible
individuals. A full discussion of the rules and requirements for each service type is
beyond the scope of this report.
Table 1. A Comparison of Coverage Under Medicare
and Medicaid for Selected Service Types
Type of ServiceCoverage Under MedicareCoverage under Medicaid(see note below)
Inpatient andCovered with limitations on theMandatory. Some states limit the
outpatient hospitalduration of inpatient hospital stays.duration of inpatient hospital stays,
and/or the number of outpatient
Mental healthCoverage is limited to 190 daysOptional. Covered by 49 states
facilitiesper lifetime in a mental hospital. and D.C. Does not cover services
Also covers partial hospitalizationfor adults between ages 22 and 64
services.who reside in an institution for
mental disease.
Nursing facilityCovered for post-hospital stays upMandatory for ages 21 and over.
to 100 days per benefit period.Generally, states do not limit the
duration of coverage.
PhysicianCovered.Mandatory. States may limit the
number of visits per year.

4 (...continued)
Prescription Drug Benefit for Dual Eligibles and State Medicaid Programs, by Karen Tritz.
5 For additional information, see CRS Report RL33202, Medicaid: A Primer, by Elicia J.

Type of ServiceCoverage Under MedicareCoverage under Medicaid(see note below)
Other licensedCovered for certain types ofOptional. Covered by 50 states
practitioners (e.g.,practitioners (e.g., physicianand D.C., though not all states or
chiropractors,assistants, clinical social workers).D.C. cover all types of
psychologists)Coverage may be restricted topractitioners.
certain types of services.
Home healthCovered for persons who needCertain home health services are
skilled nursing care on anmandatory for some individuals
intermittent basis or physical,(e.g., nursing services); others are
speech, and occupational therapy. optional (e.g., therapy). States
In addition, the individual must bemay limit the number of visits per
homebound.month, or per year.
RehabilitationCovered for inpatient rehabilitationOptional. Covered by 50 states
facilities subject to limitations onand D.C. Many states use this
the duration, and forservice category to cover mental
comprehensive outpatienthealth and substance abuse
TherapiesCovered, subject to limitations inOptional. Covered by 39 states
(physical,the total expenditures covered inand D.C. Not all states may cover
occupational,certain settings.all types of therapies for all
sp eech/language) beneficiaries.
HospiceCovered for individuals who areOptional. Covered by 47 states
considered terminally ill (a lifeand D.C.
expectancy of six months or less).
TransportationCovers ambulance services whenMandatory. Coverage is provided
necessary (other transportation isfor medical appointments.
not available).
ClinicCovers some laboratory andOptional. Covered by 48 states
screening services. Medicare alsoand D.C. States often cover
covers services provided byfreestanding ambulatory surgical
federally qualified health centers,centers, as well as mental health
rural health centers, andclinics under this category.
freestanding ambulatory surgical
Prescription drugsCovered by private prescriptionOptional. Covered by all states
drug plans. Inpatient drugs (i.e.,and D.C. For dual eligibles, states
drugs provided in nursing homesmay not cover drugs in those drug
and hospitals) are covered undercategories that are covered by
Medicare Part A.Medicare Part D.
DentalNot covered (with a fewOptional. Covered by 43 states
exceptions).and D.C. Some states may limit
services to emergency dental
services; others may also provide
preventive services.
Intermediate careNot covered.Optional. Covered by all states
facility for personsand D.C. Generally, states do not
with mentallimit the duration of coverage.

r e tar d atio n

Type of ServiceCoverage Under MedicareCoverage under Medicaid(see note below)
Personal careNot covered.Optional. Covered by 35 states
and D.C.
Private dutyNot covered.Optional. Covered by 26 states
nursingand D.C. States may limit the
duration of services covered.
Home andNot covered.Optional. As of July 2003, there
community-basedwere 275 waivers operating in 49
waiver servicesstates and D.C. These waivers
under Sectionprovide a broad range of home and
1915(c) of thecommunity-based long-term care
Social Security Actservices.
Home andNot covered.Optional. Allows states to cover
Community-Basedhome and community-based long-
Services State Planterm care services for beneficiaries
Optionwith disabilities or chronic
conditions, starting in January 2007.
This benefit is limited to individuals
whose income does not exceed
150% of the federal poverty level.
Source: CRS analysis of Medicare & You 2006 Handbook; Medicaid At-A-Glance, 2005;
unpublished Medicaid waiver data, FY2003; and CRS Report RL30526, Medicare Payment Policies,
by Sybil Tilson et al.; Deficit Reduction Act of 2005 (P.L. 109-171).
Note: This does not include required services for children under the Early, Periodic, Screening,
Diagnosis and Treatment (EPSDT) program under Medicaid. For additional state-specific information
on covered services, see the Medicaid Benefits: Online Database, at [
medicaid/benefits/index.j sp? CFID=5623668&CFT OKEN=81000927].
Some federal and state policymakers have tried to address the challenges of the
fragmentation in Medicare and Medicaid services by developing a coordinated and/or
integrated approach to delivering both Medicare and Medicaid services through
managed care. This report (1) explains the rationale for integrated managed care
programs and describes the various approaches to integration; (2) reviews existing
Medicare/Medicaid integration projects; (3) outlines common challenges faced in
developing these projects; and (4) provides policy considerations for Congress.
Rationale for Integration Through Managed Care
As described above, the Medicare and Medicaid services that dual eligibles
receive do not blend seamlessly with one another. The programs almost always have
different eligibility requirements and scope of coverage for the same (or similar)
services, as shown in Table 1 above. In some cases, there are incentives for
providers and payers to shift costs from one program to another (e.g., moving an
individual from a Medicaid-funded nursing home to a Medicare-funded hospital stay
when an individual could have remained in a nursing facility for treatment, or
unnecessarily placing an individual enrolled in a Medicare managed care plan in a

Medicaid-funded nursing facility), which may save dollars for one program but
generate higher total expenditures on an individual than without the cost-shifting.
Possible results of this fragmentation can include providers lacking information
about the full range of services someone receives, which could compromise health
care decision-making and health outcomes. Fragmentation can also lead to cost
inefficiencies in Medicare and Medicaid, as well as beneficiary confusion about what
is covered and by whom.
To improve coordination between Medicare and Medicaid, one approach has
been to integrate these two programs through managed care. Under managed care,
a single entity, a managed care organization (MCO), receives two fixed,
predetermined monthly payments (i.e., the capitation rates). These payments include
one made by CMS on behalf of the Medicare program and the other made by the
Medicaid agency on behalf of the Medicaid program.
There are different types of integration plans. Some plans developed by federal
and state policymakers cover the full range of Medicaid benefits; others have
excluded certain Medicaid benefits from managed care (e.g., long-term stays in a
nursing facility). The managed care plans may also establish various clinical care
coordination efforts to further integrate services and address an individual’s health
care needs, such as developing an interdisciplinary care team. Examples of federal
and state projects that integrate Medicaid and Medicare are provided later in this
The advantages cited by policymakers for integrating Medicare and Medicaid
under a managed care program are provided below (readers should note that
Medicare/Medicaid integration projects are not the only method of achieving these
program improvements):
!reducing fragmentation and improving service coordination;
!removing the incentive to cost-shift from one program to another
and increasing care accountability;
!enhancing the quality of care and improving health outcomes;
!increasing flexibility in the types of services that can be provided to
!focusing on prevention and care coordination activities in delivering
health care services;
!reducing hospitalization and nursing home use, with more emphasis
placed on home and community-based supports; and
!creating budget predictability for state Medicaid agencies —
particularly in preparation for demographic changes with the aging
of the population.
Though supporters of integrated Medicare/Medicaid projects have cited many
advantages, managed care is not without opposition. As discussed in more detail
later in this report, providers may have concerns about the additional requirements
or financial impact of operating under a managed care environment. Beneficiaries
may be concerned that their ability to select a provider will be restricted (or they may
have to change providers), that cost considerations by the managed care plan will

reduce the quality and availability of services, and that the contracted managed care
plans and available providers may lack knowledge and experience with the needs of
dual eligibles, many of whom have chronic health care conditions.
Types of Integration and Federal Authority
The integration of Medicare and Medicaid can occur through various contractual
arrangements between the federal and state governments and the MCO.6 In some
cases, the state will initiate an integrated Medicare and Medicaid program, require
that Medicaid managed care plans also become Medicare-approved plans, and
develop a contractual relationship or agreement with CMS to coordinate both
Medicare and Medicaid requirements (e.g., a memorandum of agreement between the
state and CMS). In other cases, the managed care plan initiates an integrated
Medicare and Medicaid program without a coordinated effort by CMS and the state7
to streamline the requirements of Medicaid and Medicare operations. In cases where
the managed care plan is initiating the integration project, the state and CMS must
still be willing to contract with, and work with, the plan to successfully implement
the project.
Most managed care programs in Medicaid and Medicare (including
Medicare/Medicaid integration projects) require some form of federal approval under
one of several possible authorities. Certain types of federal approval will occur more
quickly than others. A brief discussion of each managed care authority is provided
below, as well as the program options for managed care for dual eligibles.
Under Medicaid, managed care programs are available using the following
program authorities:
!Pre-paid health plans: These are generally used if a state wants to
include only a few services in a managed care plan. Enrollment in
the program must be voluntary.
!Section 1915(a) or Section 1932 of the Social Security Act: These
authorities include managed care options that are available under the
Medicaid state plan; they do not require a waiver. Enrollment in
managed care programs for dual eligibles must be voluntary under
these authorities.
!Section 1915(b) waiver of the Social Security Act: This waiver
allows states to require that dually eligible individuals enroll in a
managed care program to receive their services. The waiver must be
cost-effective over a two-year period.
!Section 1115 waiver of the Social Security Act: This waiver
authority is very broad. In this context, it allows states to expand

6 In this report, the discussion of managed care plans includes PACE programs because they
operate under a capitated payment methodology.
7 For a more detailed discussion of various integration approaches, see State Guide to
Integrated Medicare & Medicaid Models, by CMS, released Mar. 2006, at

Medicaid eligibility, and require dually eligible individuals to enroll
in managed care to receive services. The waiver must be budget
neutral over five years.
!Program of All-Inclusive Care for the Elderly (PACE) program:
The Medicaid component is authorized under Section 1934 of the
Social Security Act and is a Medicaid state plan option; it does not
require a waiver. Enrollment in PACE programs must be voluntary.
The PACE program, by definition a Medicare/Medicaid integration
project, is described in more detail below.
Though not a specific managed care authority, Section 1915(c) of the Social
Security Act has been combined with one of the authorities listed above to provide
home and community-based long-term care services under a managed care
environment. Several states (Minnesota and Texas, for example) have received
approval for these types of combination waivers (e.g., Section 1915(a)/(c) or Section

1915(b)/(c) waivers).

Enrollment in Medicare managed care programs must be voluntary for all
beneficiaries. Medicare managed care programs can be developed under the
following program authorities:
!Medicare Advantage: Medicare Advantage (MA) is the voluntary
managed care option under Medicare law (Part C of Title XVIII of
the Social Security Act). Managed care plans that apply to CMS to
become an MA plan must provide all Medicare-covered items and
services (including, in most cases, prescription drugs) for enrollees.
Generally, MA plans have been unable to limit enrollment to only
certain types of Medicare beneficiaries, such as dually eligible
individuals, unless they are designated as Medicare Special Needs
Plans, described below.8
!Medicare Special Needs Plan: Medicare Special Needs Plans
(SNPs) are a type of Medicare Advantage plan authorized under the
Medicare Modernization Act of 2003 (MMA, 108-173).9 MMA
permits SNP plans to limit enrollment to certain types of Medicare
beneficiaries (e.g., dual eligibles). The SNP plan must cover all
Medicare benefits for each enrollee. Enrollment in SNPs must be
voluntary for beneficiaries. The SNP option is discussed in more
detail below.
!PACE: The Medicare component of PACE is authorized under
Section 1894 of the Social Security Act. Enrollment in PACE
programs must be voluntary. A more complete description of the
PACE program is provided below.

8 For additional information, see CRS Report RS21761, Medicare Advantage: What Does
It Mean For Private Plans Currently Serving Medicare Beneficiaries?, and CRS Report
RL32618, Medicare Advantage Payments, both by Hinda Chaikind and Paulette C. Morgan.
9 For additional information, see CRS Report RL31966, Overview of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003, by Jennifer O’Sullivan
et al.

!Section 222 waiver: Under a Section 222 waiver, CMS can develop
demonstration projects that evaluate changes in methods of
Medicare payment or reimbursement.10 In the past, CMS has applied
this authority to certain Medicare/Medicaid integration projects for
dual eligibles to allow the managed care plans to receive a Medicare
capitated adjusted payment that accounts for the level of frailty of
all community-dwelling enrollees aged 55 and over.
Background on Managed Care for Dual Eligibles
To provide context for the discussion of specific Medicare/Medicaid integration
projects, this section describes managed care enrollment for dual eligibles generally
under Medicaid and Medicare. Under Medicaid, managed care has become a fairly
widely accepted service delivery system for many Medicaid beneficiaries. In June
2004, only three states (Alaska, New Hampshire, and Wyoming) did not enroll
beneficiaries in some form of Medicaid managed care. In June 2004, 61% of
Medicaid beneficiaries were enrolled in some form of managed care. Many states
(23 in June 2004), however, continue to exclude dual eligibles from managed care11
enrollment. Nationwide, about 35% of dual eligibles in FY2003 (the most recent
data available) were enrolled in some form of Medicaid managed care program.12
See Figure 1.

10 Refers to Section 222 of the Social Security Amendments of 1972.
11 CRS analysis of CMS, Medicaid managed care enrollment data, June 2004.
12 CRS analysis of Medicaid Statistical Information System (MSIS) data, FY2003.

Figure 1. Medicaid Managed Care Enrollment of Beneficiaries
by Dual Eligible Status, FY2003

Dual Eligible, Not Total Number of Beneficiaries:
Enrolled in 52.0 million
Managed Care
Dual Eligible: 9%
Enrolled in
Managed Care
Non-Dual Eligible:
Not in Managed
CareNon-Dual Eligible:
27%Enrolled in
Managed Care
59 %
Source: CRS analysis of CMS, Medicaid Statistical Information System (MSIS), FY2003.
Generally, states have limited the covered benefits under Medicaid managed
care to acute and primary care services (e.g., physicians, hospital). A few states,
however, also deliver long-term care services through managed care; in 2004, an
estimated 2.3% of individuals receiving long-term care were receiving these services
through managed care (including both dual eligibles and non-dual eligibles).13
Because nearly 70% of Medicaid expenditures for dual eligibles is spent on long-term
care services, states developing integrated Medicare/Medicaid programs have a
significant financial incentive to include long-term care services in the scope of
covered benefits under managed care where their exposure to expenditures is limited
to a monthly capitation payment. However, as discussed in more detail later in this
report, most managed health care companies have limited experience in managing
long-term care services.
Under Medicare, though managed care options have been available under the
program since the early 1980s, the percentage of Medicare beneficiaries enrolled has
been much lower than that of Medicaid since enrollment in managed care must be
voluntary. To encourage enrollment, some managed care plans offer beneficiaries
supplemental benefits (e.g., eyeglasses, dental). Despite the availability of
supplemental benefits, in September 2006 (the most recent data available), only 17%
13 P. Saucier et al., The Past, Present and Future of Managed Long Term Care, MEDSTAT
and the Muskie School of Public Service, submitted to the Department of Health and Human
Services, Apr. 2005. (Hereafter cited as “P. Saucier et al., Managed Long Term Care.”)

of Medicare beneficiaries were enrolled in Medicare managed care.14 In April 2006,
less than 2% of dual eligibles were enrolled in managed care for their Medicare
services.15 This does not include the Part D prescription drug benefit, in which all
dual eligibles are enrolled in a private stand-alone prescription drug plan (PDP) or
a prescription drug plan associated with a Medicare Advantage plan (MA-PDP).
Selecting Managed Care Plans and Setting
Payment Rates Under Medicaid and Medicare
As described earlier, in Medicare/Medicaid integration projects, a managed care
plan becomes both a Medicaid managed care plan and a Medicare managed care plan.
The MCO receives two fixed, predetermined monthly payments (i.e., the capitation
rates) from the state Medicaid agency and CMS to provide the Medicaid and
Medicare services a beneficiary needs. Although the plan may operate as an
integrated plan, the managed care plan must follow separate requirements for
Medicaid and Medicare to become an approved managed care plan. Plans are also
paid through separate Medicare and Medicaid payment mechanisms, which use
different methodologies to set capitation payments for an individual. Additional
details about the bidding and rate-setting process for Medicaid and Medicare are
described below.
For Medicaid, the process to select a managed care plan and the methodology
to set the capitation payment rate vary widely by state. Most states issue a request
for proposal (RFP) that outlines the features of the proposed managed care program
(e.g., covered beneficiaries and services, required grievance and appeal processes,
required provider networks). Interested managed care plans submit proposals to the
state in response to the RFP. From those responses, the state selects the managed
care organization(s) and awards it a Medicaid managed care contract to provide the
Medicaid services specified in the RFP. Often states enter into multi-year contracts
with these organizations. Some states allow for a public comment period while
developing an RFP; others do not.
The process for establishing the capitation rates for Medicaid also varies widely
by state. Federal law and regulation require that the capitation payments meet an
“actuarial soundness” requirement and are approved by CMS. So long as the
capitation payment meets these two requirements, the state has a significant amount
of flexibility in how it establishes and negotiates the payment rates for a specific year.
For example, states may use different data sources to establish baseline medical
costs, or different factors to account for medical inflation among providers. Some
states adjust the payment rates to account for disability or institutional status or
pregnancy; others only consider demographic factors such as age and gender. Some
states have a “collaborative” process between the state and the managed care plan to

14 S. Peterson and M. Gold, Tracking Medicare Health and Prescription Drug Plans,
Monthly Report for September 2006, Mathematica Policy Research, Inc., Oct. 6, 2006.
15 Unpublished data from the Centers for Medicare and Medicaid Services, Apr. 2006.

establish the payment rates; in other states, plans are less involved in the rate
development process.16
Under Medicare, beginning in 2006, Medicare Advantage (MA) plans are
selected through a federally administered bidding process. An organization applying
to become an MA plan submits an annual application to CMS that meets certain
requirements and a bid of the expected costs for providing services in a specific
geographic area. The bid includes the costs of providing Medicare Part A and B
benefits, Part D prescription drugs (if applicable), and supplemental benefits, if any
(including reductions in cost sharing).
CMS’s payment to an MA organization for an MA plan’s coverage of Medicare
Part A and B (A/B) benefits depends on the relationship of the plan’s bid to an
established benchmark for that geographic area. For MA plans with a basic A/B bid
below the benchmark, CMS will pay the MA organization the basic A/B bid amount,
adjusted by the individual enrollee’s risk factor, plus the rebate amount. The
individual enrollee’s risk factor is determined using a CMS-developed model that
accounts for individual differences in health status, known as the Hierarchical
Condition Category (CMS-HCC) model. The rebate part of the payment is 75% of
the difference between the plan bid and benchmark, and is used to provide mandatory
supplemental benefits or reductions in Part B or Part D premiums. CMS retains the
other 25%. For a plan with a bid equal to or above its benchmark, CMS pays the MA
organization the plan benchmark, adjusted by the individual enrollee’s risk factor
using the CMS-HCC model. In addition, CMS pays the bid amount, if any, for Part
D basic coverage.17
Medicare Special Needs Plans
and Passive Enrollment
As discussed above, the Medicare Modernization Act of 2003 (MMA) created
a new type of Medicare Advantage (MA) plan known as the “special needs plan”
(SNP). SNPs must follow all of the MA program rules, but are permitted to limit
enrollment to certain categories of Medicare beneficiaries, including (1) dual
eligibles, (2) individuals with severe and disabling chronic health care conditions,
and (3) those who are institutionalized. Previously, Medicare managed care plans
had to enroll all Medicare beneficiaries and could not limit enrollment to a certain
population. Though plans are not required to integrate with state Medicaid programs,
the SNP option was intended to improve care coordination for individuals with
complex health care needs — one approach to increased care coordination would be
the development of Medicare/Medicaid integration projects, which the SNP option

16 G. Catterrall, et al., Rate Setting and Actuarial Soundness in Medicaid Managed Care, A
Report for the Association for Community Affiliated Plans and The Medical Health Plans
of America, Jan. 23, 2006, at [].
17 For additional information, see CRS Report RL32618, Medicare Advantage Payments,
by Hinda Chaikind and Paulette C. Morgan.

In the fall of 2005, CMS permitted a subset of SNPs (42 plans in 13 states) to
passively enroll dual eligible individuals into the plan’s Medicare SNP program if the
individual was already enrolled in the plan’s Medicaid managed care plan. The
passive enrollment process was a one-time event that was part of the implementation
of the new Medicare drug benefit. Dual eligibles were moved from the Medicare fee-
for-service system into a Medicare SNP starting on January 1, 2006. Individuals
could opt out of passive enrollment and switch to another prescription drug plan, and
back to the Medicare fee-for-service system for other Medicare services. The passive
enrollment process significantly increased the level of beneficiary participation in a
single plan with both a Medicare and Medicaid contract. Some of these plans are
making a concerted effort to integrate Medicare and Medicaid services.18
The SNP market is in the early stages of development. In 2006, 276 SNPs
participated (with plans available in some areas of 41 states and Puerto Rico). Most
of the SNP plans in 2006 focused on dual eligibles.19 However, it is unclear how
many of the SNP plans are contracting with both CMS and a state Medicaid agency
(or intend to do so in the future), and to what extent the Medicare and Medicaid
services are delivered in an integrated manner.
Summary of Medicare/Medicaid Integration Projects
Several federal and state programs currently offer integrated Medicare and20
Medicaid services. Each of these programs is described in more detail below.
Program of All-Inclusive Care for the Elderly (PACE)
The Program of All-Inclusive Care for the Elderly (PACE) covers an integrated
set of Medicare and Medicaid services, including both acute and long-term care for
program participants. PACE was initially authorized by Congress as a demonstration
in 1986; however, the Balanced Budget Act of 1997 (BBA97, P.L. 105-33)
established PACE as a permanent option under both Medicaid and Medicare. Unlike
other state integration programs, the PACE program operates under a coordinated set

18 The Pennsylvania Health Law Project filed a class action lawsuit against CMS for
allowing plans to passively enroll beneficiaries into Medicare managed care. Under the
lawsuit’s settlement agreement, passive enrollment is not permitted in Pennsylvania, but can
still occur in other states. Inside CMS, CMS to Stop Allowing Passive Enrollment of Duals
Under PA Settlement, Apr. 6, 2006.
19 C. Peters, Medicare Advantage SNPs: A New Opportunity for Integrated Care, National
Health Policy Forum, Issue Brief No. 808, Nov. 2005.
20 In the past, there were three other federal demonstrations that capitated Medicare
payments under managed care, but these programs were generally not integrated with
Medicaid managed care. These demonstrations included the two Social Health Maintenance
Organization (S/HMO-I and S/HMO-II) demonstrations and EverCare. All of these
demonstrations have become Medicare special needs plans (SNPs), and are no longer
demonstrations. For additional information, see [
EvalRpts/downloads/SHMO_Summary.pdf] and [
EvalRpts/downloads/Eve rcare_Summa ry.pdf].

of federal rules and requirements outlined in Medicare and Medicaid law and
Individuals qualify for PACE if they reside in a PACE service area, are aged 55
or older, and meet a nursing facility level of care. The PACE program is modeled
after the On Lok demonstration in San Francisco, California.21 The PACE staff
includes an interdisciplinary team of staff physicians, nurses, social workers, case
managers, and other professionals. PACE services are generally delivered at a
specific site that is also an adult day center, but may also be supplemented by in-
home services or referrals.22
The Medicare capitation payment methodology for PACE differs from the
methodology used for other Medicare Advantage organizations, discussed earlier in
this report. The Medicare capitation payment for PACE is based on a combination
of two formulas: (1) a county rate multiplied by a uniform demographic PACE
frailty adjuster (to account for functional limitations such as eating or walking), and
(2) a risk-adjusted payment methodology used by the general Medicare Advantage
program.23 The Medicare capitation payment for PACE (along with three state
integration projects, discussed later in this report) is in the process of transitioning
to the methodology of the overall Medicare Advantage program based on a 100%
risk adjustment. CMS is still determining whether an additional frailty factor will be
applied to all Medicare Advantage plans in the future. Under the Medicaid program,
the monthly capitation rate is negotiated between the PACE provider and the state
Medicaid agency, and is specified in the contract between them.24
Because PACE enrollees regularly attend adult day centers where PACE
services are provided, and because of the interdisciplinary staffing model, most
PACE sites are generally implemented in urban areas, and enrollment is limited to
a few hundred individuals at each site. As of November 2005, there were 34 PACE
sites nationwide enrolling about 11,200 individuals.25 To promote the development
of additional PACE sites in rural areas, the Deficit Reduction Act of 2005 (P.L. 109-

171) established a grant program for up to 15 pilot PACE providers in rural areas.

21 For a full history of PACE, see [].
22 An adult day center refers to services and assistance provided to multiple individuals with
a disability or chronic condition in a group setting which generally operates during daytime
23 [
24 [].
25 The National PACE Association website provides information on each of the PACE sites,
for additional details, see [].

State Integration Programs
Several states have also developed Medicare/Medicaid integration projects for
dual eligibles.26 These programs vary in design and in the scope of services covered.
Some states, such as Arizona and Texas, have mandatory Medicaid managed care
programs that enroll both dual eligible and non-dual beneficiaries. Some of the
participating managed care plans may also offer a companion Medicare managed care
plan for dual eligibles. The managed care plan is responsible for integrating the
services for dual eligibles at the plan level. Even though the plan may be responsible
for integrating services, the state must be willing to contract with the plan for the
Medicaid services, and may have requirements in the Medicaid contract that a plan
become certified as a Medicare Advantage plan.
Other states such as Wisconsin, Minnesota, and Massachusetts have developed
voluntary Medicare/Medicaid integration projects, and have actively worked with
CMS to streamline Medicare and Medicaid requirements for participating plans by
developing formal agreements between the state and CMS. In these projects, the
state requires that participating plans are approved as both Medicaid and Medicare
managed care plans. These and other operational state integration projects are
discussed in more detail below.
Arizona Health Care Cost-Containment System (AHCCCS). Arizona
operates a statewide mandatory managed care program for most Medicaid
beneficiaries referred to as the Arizona Health Care Cost-Containment System
(AHCCCS). Arizona also has a separate component of AHCCCS for those who
qualify for long-term care services, known as the Arizona Long-Term Care System,
(ALTCS). Collectively, these programs cover most Medicaid services through27
managed care.
In the fall of 2005, CMS allowed six Medicare Advantage SNP (MA SNP) plans
in Arizona to passively enroll any dual eligible in Medicare managed care if the
individual was enrolled in that same organization under a Medicaid managed care
plan. Dual eligibles who do not opt out of passive enrollment will be enrolled in the
same managed care plan for both their Medicare and Medicaid services. Several of
these plans are actively integrating both Medicare and Medicaid services for these
In spring 2006, Arizona issued a solicitation to re-compete the managed care
contracts with plans to implement and operate ALTCS. As part of that solicitation,
Arizona required that managed care plans either become an MA SNP, or have a
formal relationship with an MA or MA SNP organization to improve care28
coordination for dual eligibles. In May 2006, Arizona awarded contracts to eight
managed care plans under this solicitation to provide ALTCS services.

26 Some of these projects also enroll non-dual, Medicaid-only beneficiaries.
27 See [].
28 See [

Massachusetts Senior Care Options. In 2004, Massachusetts
implemented an integrated Medicaid/Medicare program known as “Senior Care
Options.” Medicaid beneficiaries aged 65 and older in most areas of the state can
voluntarily enroll in a managed care plan for all of their Medicare and Medicaid
services. The Senior Care Options program requires that managed care plans also be
MA plans, and that individuals enroll in the same managed care company for their
Medicare and Medicaid services.
As part of Massachusetts’s program, CMS (under Section 222 demonstration
authority) permitted the Medicare capitation payment to be calculated using the
PACE program methodology — applying a frailty adjuster to account for the
increased level of impairment among enrollees.29 Similar to PACE, the
Massachusetts project is transitioning from a payment methodology that includes
both a frailty adjuster and risk-adjustment, to the standard Medicare Advantage
payment methodology, which does not include a frailty adjuster.
Minnesota Senior Health Options (MSHO) and Disability Health
Options (MnDHO). For nearly 10 years, Minnesota has operated voluntary
integrated Medicare and Medicaid projects, one initiative for the elderly (MSHO),
starting in 1997, and another for adults with disabilities (MnDHO), starting in 2001.
The Minnesota integration projects cover all Medicare services and most Medicaid
acute and long-term care services. Similar to Massachusetts, the Medicare capitation
payment uses the PACE payment methodology, described earlier, under the authority
of a Section 222 demonstration. The additional frailty adjuster will also be phased
out, effective December 31, 2007.
In 2005, MSHO expanded to become a statewide option for beneficiaries.
Though MSHO is voluntary, individuals who do not choose MSHO are required to
enroll in another Medicaid managed care program. For adults with severe disabilities
under age 65, MnDHO is a voluntary alternative to the Medicaid fee-for-service
system, and is available in seven counties.
In 2006, all participating MSHO and MnDHO plans became Medicare SNPs.
Under an agreement between the state and CMS, these Medicare managed care plans
are permitted to continue operating separate programs for the elderly and adults with
disabilities through December 2007.30
Following the Medicare passive enrollment process for dual eligibles (described
earlier in this report), MSHO enrollment jumped from 9,800 in November 2005, to

33,400 in January 2006. MnDHO currently enrolls about 600 individuals.31

29 See [
30 Other SNPs must enroll all individuals in the group covered (e.g., dual eligibles),
regardless of age.
31 P. Parker, Special Needs Plans & Medicaid: The Minnesota Experience, Presentation at
the Medicare Advantage Congress, Jan. 26, 2006.

New York Medicaid Advantage Program. In January 2005, New York
offered dual eligibles aged 21 and older the option of voluntarily enrolling in an
integrated Medicare and Medicaid program. This plan provides all Medicare services
and certain Medicaid services, including most acute care services not covered by32
Medicare and a limited set of long-term care services. Participating plans must be
both Medicare Advantage and Medicaid managed care plans. The Medicaid
Advantage program is available statewide, and in March 2006, enrolled about 3,800
dual eligibles.33
Texas Star+Plus. Texas STAR+PLUS is a mandatory Medicaid managed
care program that integrates delivery of all Medicaid acute and long-term care
services and for some participants, also integrates Medicare services. The program
covers most Medicaid recipients who are elderly or have disabilities in Harris County
(which includes Houston). As of June 2004, Texas Star+Plus enrolled about 52,900
individuals, including both dual eligibles and non-dual eligibles.
Dual eligibles have the choice between two Medicaid managed care plans; both
of the plans are also certified as Medicare SNPs and receive a Medicare capitation
rate to cover all Medicare services.34 Enrollment in the Medicare managed care
portion is voluntary. To encourage beneficiary participation, the plans and the state
highlight the additional prevention and care coordination activities that are available
if a dual eligible enrolls in the companion Medicare plan for his or her Medicare
services. In fall 2005, 20,000 dual eligibles who were participating in Texas
Star+Plus were passively enrolled into their companion Medicare managed care
plan. 35
Texas STAR+Plus was slated for expansion to all the state’s urban areas, but
ultimately was not approved by the state legislature because the expansion efforts
would have made urban hospitals ineligible for approximately $75 million per year
in funds generated through the federal upper payment limit (UPL) mechanism.36 The
UPL mechanism allows states to make supplemental payments (up to the Medicare
rate) for care provided at government facilities, allowing these states to claim
additional federal matching dollars. A provision in the state’s recent biennial budget
directed the Texas Health and Human Services Commission to develop an

32 See [
33 See [


34 For additional information, see [].
35 P. Saucier, Managed Care for Special Populations: State and Federal Developments,
Presentation at PACE Spring Policy Forum, May 1, 2006.
36 For additional information, see CRS Report RL31021, Medicaid Upper Payment Limits
and Intergovernmental Transfers: Current Issues and Recent Regulatory and Legislative
Action, by Elicia J. Herz.

appropriate care management model to be used in other areas of the state, as long as
it would preserve UPL to hospitals.37
On April 26, 2006, the Texas Health and Human Services Commission
announced that Texas Star+Plus would be expanding to include three other service
areas of the state, with five managed care plans tentatively scheduled to provide
services starting in January 2007. The payment structure for inpatient hospitals
within Texas Star+Plus would preserve UPL funding to hospitals.38
Washington Medicare/Medicaid Integration Program. Effective June
1, 2005, dual eligibles aged 65 years and older who live in King and Pierce counties
could voluntarily enroll in an integrated Medicare/Medicaid program with Evercare
Premier.™ CMS initiated the project and selected Evercare Premier through a
formal solicitation process to offer Medicare managed care as a Medicare SNP.
CMS pays Evercare Premier the capitation rate for Medicare services, and the state
pays the Medicaid capitation payment for those Medicaid services not covered by
Medicare, including long-term care services. The state expects 600 to 1,000
individuals to enroll in this project.39
Wisconsin Partnership Program. Wisconsin operates a voluntary
integrated Medicare and Medicaid project that covers most acute and long-term care
Medicaid services and all Medicare services. The Wisconsin Partnership Program
(WPP) has four sites serving a total of six counties that provide services to older
adults and individuals with disabilities who require the level of care needed in a
nursing facility. The Medicare capitation payment also uses the PACE payment
methodology under Section 222 demonstration authority. Similar to the projects in
Massachusetts and Minnesota, WPP is transitioning to the Medicare Advantage
payment methodology in the future. As of February 2006, WPP enrolled about 1,900
individuals. Wisconsin has been pursuing efforts to expand its managed care
initiatives for the elderly and those with disabilities, which could include an
expansion of WPP.40
Other Activities
Several other states (California, Florida, and Maryland) are in the formative
stages of developing integrated Medicare/Medicaid programs. The Appendix at the
end of this report has a more detailed description of activities in these states.
There is no comprehensive list of the numbers of managed care plans that may
be integrating Medicare and Medicaid services at the plan level. From the state or

37 See Texas State Legislature, Seventy-Ninth Legislature, Text of Conference Committee
Report, Senate Bill No. 1 Regular Session, p. II-110, at [


38 See [].
39 For additional information, see [].
40 For additional information, see [] and
[ Care/rfi/RFI10-20-05.pdf].

CMS perspective, these plans may not be distinguishable from nonintegrated plans.
For example, several large Medicaid managed care organizations have become
Medicare SNPs in Hawaii, Oregon, Arizona, and Rhode Island.41 It is unclear what
level of integration this will bring; some plans may be covering both Medicare and
Medicaid services but not integrating those services through a coordinated delivery
system. For example, the Medicaid and Medicare services may be delivered by
different organizational units of the plan.
The scope of services may also differ. Plans in the states discussed earlier are
providing and integrating both acute and some long-term care services; however,
plans in other states may be solely focused on integrating acute care services (with
long-term care services still provided through the Medicaid fee-for-service system.)
Finally, a private nonprofit organization, the Center for Health Care Strategies,
Inc. awarded funding to five states (Florida, Minnesota, New Mexico, New York, and
Washington) to integrate the financing, delivery, and administration of primary,
acute, long-term care, and behavioral health services. The initiative is focused on
beneficiaries who are elderly and those with disabilities who are either enrolled in
Medicaid or are dual eligible. Some of these states have existing projects that they
are expanding; others are in the initial stages of development.
Results of Integration Projects
The studies evaluating integrated Medicare and Medicaid programs have been
somewhat limited in the length of the evaluation period but have generally evaluated
a broad range of topics (e.g., cost, utilization, consumer satisfaction). This report
focuses on the available outcomes related to service utilization, cost, and mortality.
Generally, evaluations of Medicare/Medicaid integration projects have shown
decreased utilization of high-cost services such as emergency room, hospital, and
nursing facility services, and increased access to home and community-based long-
term care services. Evaluations of the fiscal impact of these programs have been
inconclusive. In some cases, expenditures were higher than a fee-for-service
comparison group; in other cases, the net cost was comparable — there were savings42
to Medicare that were offset by higher Medicaid expenditures.
In the area of mortality, results were mixed. In evaluations of PACE and the
WPP program, the mortality rates for PACE enrollees and younger adults with43,44
disabilities in WPP were lower than for comparison groups. An evaluation of
Minnesota’s MSHO program found no differences in mortality rates for MSHO

41 J. Packer-Tursman, “Regence Balks at Offering Regional Plan, But MA Plans Target ‘07
MA Entry,” Medicare Advantage News, Jan. 26, 2006.
42 P. Saucier et al., Managed Long Term Care.
43 See [].
44 R. Kane and P. Hornyak, Multi State Evaluation of Dual Eligibles Demonstration, Aug.


enrollees compared to a control group. Other quality indicators were similar for
MSHO enrollees and a comparison group. The evaluation did, however, find
significant differences in the reported burden of family caregivers, with the families
of MSHO enrollees having more positive outcomes.45
Challenges in Developing
Medicare/Medicaid Integration Projects
This section discusses common challenges in developing integrated Medicare
and Medicaid programs (though specific circumstances will vary by state and by
program.)46 The description of challenges is not intended to presuppose that
managed care is preferable to the traditional fee-for-service approach. While
reducing fragmentation of services and increasing care coordination seem to be
worthy policy goals, other factors (e.g., freedom of choice in one’s provider) must
also be evaluated.47
Level of State Investment and
Expected Returns on Investment
Though states may see a benefit from the greater budget predictability and
accountability through managed care, the available studies indicate that cost savings
for dual eligibles will likely be realized by Medicare and/or the managed care plan
because of the lower utilization of primarily Medicare-funded services (e.g.,
emergency room, inpatient hospital, and short-term nursing facility stays) and the
increased utilization of Medicaid-funded, home and community-based, long term care
services (e.g., personal care, and Medicaid home and community-based waiver
services).48 Depending upon the structure of the program, states may see some
Medicaid savings if there are reductions in long-term nursing facility stays under
these integrated programs, or if the Medicare capitation payment results in coverage
of supplemental services that otherwise would have been covered by Medicaid.
In addition to issues related to the impact of these programs on the Medicaid
budget, developing Medicare/Medicaid integration projects takes a substantial
investment in state time and resources. For the existing state projects that required
federal waiver(s) for Medicaid under Section 1115 or Medicare under Section 222,

45 R. Kane, et al., “Outcomes of Managed Care of Dually Eligible Older Persons,” The
Gerontologist. Apr. 2003.
46 Information gathered through interviews with selected state staff, CMS, and other
47 For an overview of general operational concerns about managed care, see R. Kronick,
“Waiting for Godot: Wishes and Worries in Managed Care,” Journal of Health Politics,
Policy and Law, vol. 24, no. 5, Oct. 1999, pp. 1099-1106.
48 States that also include elderly and those with disabilities who are not dual eligibles may
realize savings from lower utilization in Medicaid-funded, high-cost, high-intensity services
(e.g., hospital).

the federal approval process took several years. With the availability of the Medicare
SNP option, federal approval for the Medicare managed care program may happen
significantly faster than in the past. For Medicaid, in states that are interested in
pursuing integration projects in which Medicaid enrollment would be mandatory or
would have other features that require a federal waiver, the investment of time and
resources may still be considerable. For integration projects with voluntary
enrollment, federal approval may happen more quickly because of the various
Medicaid managed care options under the state plan.
Beyond the time it takes to receive federal approval for integrated programs, a
state may also need to become familiar with the Medicare managed care rules and
regulations, and may have to determine how to structure the delivery of long-term
care services in a managed care environment (e.g., service requirements, quality
assurance mechanisms, availability of qualified plans, rate setting, and compatibility
with a state’s existing home and community-based waiver programs under Section
1915(c) of the Social Security Act). Though many states are familiar with the
delivery of acute care services via managed care, fewer states have experience with
managed long-term care services — which has a different infrastructure, set of
providers, and constituencies than the acute care system.
Conflicting Medicare and Medicaid Requirements
Other significant challenges include the conflicting requirements between
Medicare and Medicaid law, and the differing requirements for program
administration, such as enrollment and disenrollment policies, beneficiary marketing,
grievance and appeal processes, payment schedules, quality requirements, oversight,
and data collection. These conflicts in some cases pose barriers to operating
integrated Medicare/Medicaid programs.
Recently, CMS, states, and other technical assistance providers have been
working to address these conflicts by identifying specific areas of conflict and posing
administrative solutions. Some areas can be addressed by CMS through its
administrative or regulatory authority, and other areas may require legislation to
resolve the issues. For example, integrated Medicare/Medicaid managed care plans
are subject to separate auditing requirements under Medicare (as conducted by CMS
or CMS contractors) and Medicaid (as conducted by the state Medicaid agency
and/or the state health department). CMS and the state could consider streamlining
or coordinating the audits to make the process more efficient. Once these issues are
addressed, a second step will be to ensure that there is consistent application across
CMS Regional Offices, since some of the decision-making authority for these types
of programs resides in each Regional Office.
Some of these issues have been addressed in administrative guidance issued by
CMS. In July 2006, CMS released several “How To” guides for states and managed
care plans that are implementing Medicare/Medicaid integration projects. The guides
address the areas of enrollment, marketing, and quality, and are intended to clarify

Medicare and Medicaid rules and suggest processes that states and the plans can use
to fulfill Medicare and Medicaid requirements.49
The issue of conflicting requirements does not apply to PACE demonstrations.
The PACE sites follow a separate administrative review process and have separate
statutory and regulatory guidance.
Managed Care Payment Rates
The rate-setting process for integrated Medicare and Medicaid projects may be
difficult for some states to develop. The state may not know the details of the
Medicare contract (e.g., what the plan submitted as a bid and what supplemental
benefits the plan might offer). States may have difficulty determining how the plan’s
Medicare managed care bid fits with what the state would be paying the plan for its
Medicaid services. This is complicated by the fact that the current Medicare
Advantage payment methodology is changing. Starting in 2004, MA payments began
including a risk-adjustment factor (calculated by the CMS Hierarchical Condition
Category, or HCC, model). The CMS-HCC model continues to be updated and
Another challenge is that while many states are familiar with setting managed
care rates for acute care services, they may not have experience in rate-setting that
includes long-term care services — which has a different utilization pattern and a
different set of providers. Some questions may include the following: How should
the state account for individual differences in health status through risk adjustment
for the elderly and those with disabilities? How can available data sources be used
to inform the rate-setting process for long-term care?51 In addition, states may want
to build certain policy incentives into the rates — for example, to serve individuals
in the community instead of in an institution. Addressing these issues may pose a
challenge for some states.
Federal Waiver Approval
If the state’s proposed program requires a waiver of Medicaid law (primarily for
those programs with mandatory enrollment), one of the challenges states face is how
a proposed Medicare/Medicaid integration project can meet any budget-neutrality or
cost-effectiveness requirements associated with a waiver. Generally, budget-
neutrality or cost-effectiveness requirements do not consider savings to Medicare as
offsetting any increases in Medicaid expenditures; the fiscal impacts of the program

49 See [
50 See [


51 Personal Communication with Melanie Bella and Lindsay Palmer, Center for Health Care
Strategies, Apr. 20, 2006. (Hereafter cited as Pers. Communication, M. Bella and L.

to Medicaid and Medicare are evaluated separately. As described earlier, it is not
clear that Medicaid costs decrease under Medicare/Medicaid integration projects.
Willingness of Medicare Advantage Plan
to Contract with the State Medicaid Agency
Some Medicare Advantage plans (including SNPs) may not be interested in
participating in a risk-based contract for Medicaid services (such as long-term care).
These plans may focus efforts on solely delivering Medicare services and rely on
Medicaid fee-for-service to provide wraparound benefits. The specific reasons will
vary, but some of the concerns in contracting with the state could include
!limited experience with covering long-term care, which has different
financial risks, providers, service requirements, and beneficiary
concerns than acute care services;
!limited familiarity or experience with Medicaid contracting rules or
a state’s administrative processes;
!the potential for, or frequency of, changes to the state’s Medicaid
program (rates, benefit package);
!the expected level of enrollment, which may not be sufficient to take
on the financial risk of participation, particularly if the program has
voluntary enrollment; and
!the level of Medicaid managed care rates or the rate-setting
Ability of Medicaid Long-Term Care Providers
to Meet Managed Care Requirements, and
Cover Acute and Primary Services
Public or private organizations with experience in providing long-term care
services may be interested in becoming a managed care plan under an integrated
Medicare/Medicaid program. However, these providers may have limited experience
with operating a managed care plan or covering acute and primary services.
Developing knowledge and expertise in these areas may take a significant investment
of time and resources. Some of these areas include (1) managing financial risk for
various types of services (i.e., primary, acute, and long-term care); (2) developing and
administering operation and information systems that gather, analyze, and report how
participants are using covered services; and (3) establishing a process to allocate
resources under managed care.
For those groups that have experience with Medicaid managed care, there may
be other areas of knowledge and investment needed to become a qualified Medicare
Advantage plan. For example, the organization may have to become familiar with
the Medicare bidding process and meet other Medicare requirements, such as having

a certain amount of available capital in the organization and meeting minimum
enrollment thresholds.52
Provider Issues
Upper Payment Limit Policies and Managed Care. Under the Medicaid
program, states have broad flexibility in determining the payment rates for Medicaid
providers; however, the total payments to hospitals and nursing facilities cannot
exceed an upper payment limit (UPL), which is the rate that Medicare would have
paid. Federal regulations outline the methodology states must use to report
expenditures to ensure that Medicaid expenditures do not exceed the UPL limits.
Some states have also used these UPL provisions to draw down additional federal
Medicaid funding.53
Under current federal guidelines, states are not permitted to collect this
additional funding by applying the UPL to Medicaid managed care rates. Under a
managed care program, states and/or providers would be required to forego the
additional federal Medicaid dollars generated through UPL funding arrangements.
This loss of federal funding could provide a significant disincentive to states and54
providers to develop or participate in managed care programs.
Alternatively, lower inpatient hospital and emergency room utilization have
been sources of savings for Medicare/Medicaid integration projects — though these55
savings largely accrue to Medicare for dual eligibles. In considering these
integration projects, a state will have to consider the following: How much, if any,
additional federal UPL funding would be lost by implementing a Medicare/Medicaid
integration project? What, if any, impact would there be on public hospitals? What
would be the expected cost or savings to the state budget?
In Texas, which was considering a statewide expansion of its integrated
managed care program, the loss of federal revenue generated through UPL payments
would have decreased funding to hospitals by approximately $75 million per year,

52 Pers. Communication, M. Bella and L. Palmer.
53 For additional information, see CRS Report RL31021, Medicaid Upper Payment Limits
and Intergovernmental Transfers: Current Issues and Recent Regulatory and Legislative
Action, by Elicia J. Herz.
54 This issue is not unique to integrated Medicare/Medicaid projects; these requirements also
apply to other Medicaid managed care programs. Some states implementing managed care
have received waivers from CMS under Section 1115 of the Social Security Act, which has
allowed them to preserve UPL funding.
55 If the Medicaid managed care program also includes non-dual eligibles, savings would
accrue to Medicaid since the services ‘normally’ covered by Medicare for dual eligibles
(e.g., hospital stays) would be covered by Medicaid.

and was a significant enough barrier to block the proposed expansion of its integrated
managed care program.56,57
Other Provider Concerns. In other cases, providers have been resistant to
developing integrated Medicare/Medicaid managed care programs. There are
concerns that the programs would change the patient-provider relationship, increase
the provider’s administrative burden, move the payment authority from the state
agency or legislature to a managed care plan,58 or impose more requirements for
payment than existed under the fee-for-service system.
Some of these concerns were expressed by the Texas Medical Association
(TMA) in the recent proposed expansion of Texas Star+Plus, excerpted below:
While physicians support elements of STAR+PLUS, such as better integration
and management of the continuum of care for eligible patients, TMA and local
medical societies do not believe that another Medicaid managed care model can
be integrated into the system without causing it to collapse. In areas with
Medicaid managed care already, physicians and health care providers are already
at their breaking points. The expansion of STAR+PLUS or other Medicaid
managed care pilots will exacerbate existing Medicaid provider shortages.
For example, if expanded, physicians in Dallas would have to contend with
STAR, the physical health Medicaid managed care program; NorthSTAR, the
Medicaid behavioral health pilot; CHIP; and STAR+PLUS. Each of the
programs has different administrative and claims payment requirements, adding59
complexity to a system few physicians are willing to navigate today.
Providers also have concerns that the programs would affect their current
funding or service delivery system. For example, in 2005, California’s state budget
proposed piloting an integrated Medicare/Medicaid program in three counties. One
of the concerns raised about the proposal was that the new program would disrupt the60
existing county-based in-home supportive services program (IHSS). This concern
was a significant factor in changing the proposal released in the 2006 budget, which
now proposes to integrate all Medicare and Medicaid services except county-based
IHSS services.
In some states, groups representing the nursing home industry have also
expressed concerns about managed care programs that include long-term care
services. These types of programs have generally been shown to decrease nursing
home utilization and increase the availability and provision of home and community-
based services. Groups representing the nursing home industry may express concerns
if, in their view, such programs would divert money that would otherwise be spent

56 [].
57 [
58 P. Saucier et al., Managed Long Term Care.
59 [].
60 [].

on nursing facility services, or if they have concerns that the negotiating power of the
plan would lower payment rates.
Attractiveness of Managed Care to Beneficiaries
As described earlier, Medicare beneficiaries generally can voluntarily choose
whether to enroll in Medicare managed care. States offering integrated
Medicare/Medicaid programs have either voluntary enrollment or mandatory
Medicaid enrollment with incentives to voluntarily enroll in a companion Medicare
managed care plan. In Massachusetts, certain Medicaid benefits (e.g., vision, dental)
maintained in the Medicare/Medicaid integrated Senior Care Options program were
cut from the fee-for-service program, making the integrated Medicare/Medicaid
program more attractive to beneficiaries.61
Some possible concerns of dual eligibles about joining a managed care program
may include (1) the limitations to an individual’s choices and flexibility in the
services he or she receives; (2) the expertise of the managed care plan about disability
and chronic conditions; (3) the breadth and scope of covered benefits; (4) the
continuity with existing physicians/service providers; and (5) the concern that the
plan’s financial incentives for savings will ultimately result in limiting services and
Policy Considerations for Congress
Looking at the challenges in developing integrated Medicaid and Medicare
programs, there may be opportunities for further policy exploration. It should be
noted that action in any of these areas would need to be weighed against prevailing
fiscal constraints, efforts to ensure fiscal accountability (since service-specific
utilization information may be less available under managed care), and possible
conflicts with other important societal goals (such as maintaining beneficiary choice
over his or her health care provider). With these qualifications, the following are
offered as brief illustrations of policy options that Congress could consider as part of
its interest in and oversight of this area:
!conducting evaluations and developing recommendations for
regulatory and/or statutory changes;
!adding statutory language or explicit waiver or demonstration
authority, to both Medicaid and Medicare law to allow for these
types of programs under a single authority;
!giving states the option to require dual eligibles to enroll in managed
care projects that integrate with Medicare through a Medicaid state
plan option;
!streamlining federal oversight and/or administration of these
demonstrations to avoid conflicting requirements;
!providing development grants and technical assistance to states;

61 P. Saucier et al., Managed Long Term Care.

!minimizing existing financial disincentives for providers to
participate in managed care (e.g., phasing out UPL payments,
providing supplemental funds through managed care savings, or
minimzing the financial risk providers assume in the PACE
program); and
!addressing financial disincentives for states (e.g., exploring
alternative definitions of cost-effectiveness and budget neutrality in
waivers for Medicare/Medicaid integration projects, or sharing any
cost savings with both the Medicare and Medicaid programs).
The Deficit Reduction Act of 2005 (DRA, P.L. 109-171), enacted on February
8, 2006, established a PACE Provider Grant Program. Section 5302 of the bill
creates site development grants, provides technical assistance to established rural
PACE providers, and establishes an outlier fund for rural PACE providers. Grants
of no more than $750,000 each will be awarded by the Secretary to 15 qualified
PACE rural providers or pilot sites. DRA also requires the Secretary to establish a
technical assistance program to provide (1) outreach and education to specified
entities interested in starting rural PACE programs, and (2) technical assistance
necessary to support rural PACE pilot sites. An outlier fund for inpatient and related
physician and ancillary costs incurred for an eligible participant within a given 12-
month period is required. The Secretary is appropriated $10 million for FY2006
through FY2010 (amended by P.L. 109-432) for the outlier fund. The Secretay is
also required to submit a report to Congress on the evaluation of the rural PACE pilot
Several bills have been introduced during the last several Congresses to
encourage the development of integrated Medicare/Medicaid programs. For
example, in the 109th Congress, Senator Grassley introduced S. 1602, the Improving
Long-Term Care Choices Act of 2005, which included provisions to require the
Secretary of the Department of Health and Human Services to consult with
stakeholders and issue regulations to remove administrative barriers to integration of
Medicare and Medicaid for dual eligibles. The legislation also would have required
the Secretary to submit recommendations to Congress on how to remove statutory
barriers to integration. This bill was referred to the Senate Finance Committee.
In the 108th Congress, the Medicare Special Needs Plan was enacted as part of
the MMA. In addition, Senator Baucus introduced S. 2562, the Medicare Quality
Improvement Act of 2004, which would have required the Medicare Payment
Advisory Commission (MEDPAC) to study and report on care coordination
programs for individuals dually eligible for Medicaid and Medicare. The study and
report were to include the impact of care coordination programs on beneficiaries, and
on the cost and savings to Medicare and Medicaid, including whether “any savings
from care coordination programs are counted as a benefit to either program.” This
bill was referred to the Senate Finance Committee.
In the 106th Congress, Representative Stark introduced H.R. 4981, the Chronic
Illness Care Improvement Act of 2000. This legislation would have added specific
waiver authority under Medicare and Medicaid to establish coordinated, integrated

projects for dual eligibles. This provision would have allowed Medicare managed
care rules to be waived to permit greater coordination with Medicaid, and would have
mandated that the cost-effectiveness test be evaluated using the cost and savings
attributable to both the Medicare and Medicaid programs. This bill was referred to
the House Subcommittee on Health and Environment.

Appendix. States With
Legislative Action to Consider or Enact
an Integrated Medicare/Medicaid Program
The California state budget for 2005 and 2006 proposed an integrated Medicaid
and Medicare program for dual eligibles. The program would have been piloted in
three counties in the state. The 2005 proposal resulted in significant concerns by the
county-based in-home support providers. The revised 2006 budget proposed an
integrated Medicare/Medicaid managed care plan that does not include county-based
in-home support services.62,63
As part of Florida’s efforts to restructure its Medicaid program, the state is also
developing an integrated managed care program for the elderly. In January 2006,
Florida submitted a Medicaid waiver application to CMS to create the Florida Senior
Care program, which would contract with managed care programs to provide all
Medicaid services, cover all Medicare co-payments and deductibles, and coordinate
with Medicare services. Florida Senior Care would be piloted in two areas of the
state, and would enroll most Medicaid beneficiaries aged 60 or older. One pilot area
would have mandatory enrollment; the other would have voluntary enrollment.
At this point, it is unclear to what extent the managed care plans will also
become Medicare Advantage plans. If the plans become MA plans, additional
integration may occur at the plan level (similar to the Texas Star+Plus program).64
In August 2005, the Maryland Department of Health and Mental Hygiene
(DHMH) submitted a Section 1115 waiver request to the federal government to
create a new Medicaid program, called CommunityChoice, to develop a managed
care program for the elderly and people with disabilities. This program would65
initially be piloted in two areas of the state, with an expected enrollment of 50,000.
The program would be mandatory for certain groups of individuals who live in the
pilot areas, including dual eligibles, Medicaid beneficiaries aged 65 and over, and
individuals who need long-term care services (except those enrolled in PACE or the

62 [

20Care%20Integration% 20Final%203-23-05.pdf].

63 [].
64 [
65 T. Engelheart, The Maryland CommunityChoice Program, Presentation to the PACE
spring policy forum, May 1, 2006.

Medicaid home and community-based waiver for people with developmental
The CommunityChoice program would include primary, acute, and long-term
care services, with a goal of coordinating Medicare funding for dual eligibles. To
facilitate coordination with Medicare, all CommunityChoice plans would be required
to be licensed as Medicare Advantage Plans. Participants may then choose to receive
both their Medicaid and Medicare services from one organization. Administratively,
certain requirements of the CommunityChoice program would mirror Medicare
Advantage program requirements to avoid duplication.66

66 [].