State Strategies to Manage Budget Shortfalls

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Case Study: Arizona's Managed Care Program

In 1982, Arizona became the last state in the union to enter the federal Medicaid system when it received a federal waiver to operate its managed care program--the Arizona Health Care Cost Containment System (AHCCCS). Under Section 1115 of the Social Security Act, the state is allowed to pursue Medicaid projects that test new and innovative ideas relating to benefits and services by waiving certain federal requirements. The AHCCCS program originally provided only limited Medicaid services, but it has since been expanded to include all Medicaid services that are required under federal law. The primary AHCCCS acute care program covers about 450,000 beneficiaries.

In 1989, the AHCCCS program initiated a managed care program for recipients of long-term care. This program offers acute care, nursing home care and home- and community-based services to the elderly and disabled. The long-term care component of AHCCCS covers about 20,000 people.

Since its inception, AHCCCS has been a pure form of managed care that pays managed care organizations on a capitated basis. Capitation is a method of payment for health service in which a provider is paid a fixed amount over a specific period of time for each person enrolled, regardless of the number or nature of services provided. The state solicits bids from managed care organizations in each of its counties and awards contracts based on price and past performance.

The AHCCCS accumulated an impressive record of savings during its first decade of operation, spurring other states to study and in some cases borrow from the Arizona model. The annual per capita growth rate for program expenditures between 1983 and 1991 for the AFDC and Supplemental Security Income (SST) populations was 6.8 percent, compared with a national average of 9.9 percent for the traditional Medicaid program. More recent data continue to reflect favorably on the program. AHCCCS capitation rates--the amount that the program pays to managed care networks per beneficiary--fell by 11 percent between 1994 and 1995. The program cost 8 percent less than fee-for-service programs in a 1990 evaluation and 11.3 percent less in 1993.

Studies by the U.S. General Accounting Office show that the AHCCCS program has been very effective in controlling the growth of expenditures in the long-term care arena, particularly for the disabled population. Between 1987 and 1991, annual expenditures for SSI-eligible disabled beneficiaries grew by 5.4 percent annually versus an estimated 17.3 percent annual growth in a fee-for-service program. For aged beneficiaries under AHCCCS, annual costs grew by an average of 9.5 percent compared with a 17.2 percent growth rate under the fee-for-service benchmark.

GAO and other studies of the Arizona program cite competition among a large number of managed care organizations as a key factor in controlling the cost of AHCCCS. Another factor contributing to the success of the program is the federal waiver that allows managed care organizations to serve only Medicaid clients, instead of following federal requirements that 25 percent or more of a managed care organization's clients be non-Medicaid. Evaluations also show that AHCCCS cost reductions have not harmed access to appropriate care and that Arizona's managed care system has been successful in both urban and rural areas.

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Written December 1996, posted January 2003, reviewed December 2003
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