Health-Based Capitation Risk Adjustment in Minnesota Public Health Care Programs

By Gifford, Gregory A.; Edwards, Kevan R. et al. | Health Care Financing Review, Winter 2004 | Go to article overview

Health-Based Capitation Risk Adjustment in Minnesota Public Health Care Programs


Gifford, Gregory A., Edwards, Kevan R., Knutson, David J., Health Care Financing Review


BACKGROUND

Problem

Minnesota began a prepaid managed care demonstration, under an 1115 waiver (Weiner et al., 1998), for its public health care programs in 1985. A key component of this demonstration is that the State pays participating managed care organizations a fixed, prepaid premium or monthly capita tion payment for each health plan enrollee. Capitation is defined as a contract arrangement whereby a purchaser agrees to pay health plans a fixed payment per capita/enrollee per month in return for which health plans assume responsibility for the provision of all covered services for their enrolled populations (Hurley, Freund, and Paul, 1993). Health plans are then effectively at risk for additional health care costs that exceed capitation revenues.

There are formally three distinct prepaid public program populations administered by the State of Minnesota: (1) the Prepaid Medical Assistance Program (PMAP), (2) Prepaid General Assistance Medical Care (PGAMC), and (3) Prepaid Minnesota Care (PMNC). PMAP is Minnesota's Medicaid managed care program that serves low-income residents, including Aid to Families with Dependent Children (AFDC)-eligible families, pregnant females, children, and the elderly. PMAP operates in 83 of Minnesota's 87 counties and continues to expand.

PGAMC is a managed care program that serves low-income Minnesota residents who do not qualify for PMAP or other State or Federal health insurance programs. PGAMC primarily serves single or marfled Minnesota residents between the ages of 21 and 64 who have no children.

PMAP and PGAMC were implemented in 1985. There were approximately 249,000 PMAP enrollees and 28,000 PGAMC enrollees in calendar year (CY) 2000.

PMNC is a subsidized insurance program for Minnesotans who have somewhat greater assets than people eligible for PMAP or PGAMC, but no other access to public or private health insurance. PMNC began in October 1992 and converted to a prepaid managed care program in 1996. PMNC is jointly funded by the Federal Government, a 1.5-percent tax on health care provider revenues, and enrollee premiums, which are assessed on the basis of a sliding scale. Approximately 165,000 persons were enrolled in PMNC in 2000. This article focuses exclusively on the PMAP and PMNC programs.

From the inception of these programs and until January 1, 2000, capitation payment rates have been based on combinations of the demographic characteristics, age, sex, prepaid program, region, institutional status, Medicare coverage status, pregnancy status, parental status, and family income. Rates for some programs were further adjusted by region. Over time, experts and policymakers have become increasingly concerned about biased selection, the profit realized by enrolling healthier, low-cost enrollees, and the financial penalties that can result for health plans from enrolling sicker, high-cost enrollees, and generally the inadequacy of demographic-based capitation ratesetting systems (Newhouse et al., 1989; Fowles et al., 1996).

As a result, it has become apparent that the demographic basis of capitation rates does not sufficiently reflect the relative health based risk of prepaid populations. To address this need, a number of methods of measuring population health status have been developed in recent years, supported in part by the Federal Government for possible application to the Medicare Program (Weiner et al., 1996; Ellis et al., 1996; Medicare Payment Advisory Commission, 1998).

Risk-Adjustment Mandate in Minnesota

Proposals to set capitation rates for these programs on the basis of health stares-based risk adjustment first surfaced in the Minnesota health policy arena in 1993, as a part of State and national level health care reform proposals (Minnesota Departments of Health and Human Services, 1996). In 1994, legislation was passed that required the submission of a report by the Minnesota Departments of Health and Commerce regarding the implementation of risk adjustment. …

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