Strategy 10: Selective Contracting

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Description of Strategy

As states gain experience with managed care for Medicaid beneficiaries and as providers become accustomed to a range of complicated financial arrangements, states may turn to selective contracting and competitive bidding as cost-saving alternatives for purchasing services. These approaches may be used within managed care or fee-for-service systems.

In selective contracting, states contract with a limited number of providers to supply certain agreed upon services for Medicaid beneficiaries. By limiting the number of providers and managing services, states can potentially lower costs, monitor quality, and increase access to services in underserved areas.

Although states commonly contract selectively with managed care plans, other opportunities exist to use selective contracting. For example, states can use selective contracting for non-emergency transportation, durable medical equipment (DME), nursing home services, specialty inpatient services, including neonatal intensive care, organ transplants, psychiatric services, laboratory services, and vision care. (See figure 10.)

When using selective contracting for services, states can set rates through a competitive bidding process or negotiate directly with providers. In competitive bidding, states require providers or plans to submit bids and compete with one another to offer services. Selective contracting provides an incentive to current providers to submit lower bids to preserve their share of the market. They may compete on both quality and price, although typically price is most important. The approach relies on competitive market forces to set prices, with the expectation that this will lead to lower reimbursement rates.

Some states also have used competitive bidding to establish benchmarks as a starting point for negotiation. Fourteen states that employed competitive bidding used final rate negotiations to procure contracts, and six states negotiated directly with the plans from the start.(1) In its managed care program, Massachusetts negotiates directly with each plan, but expects plans to submit a "good faith" proposal prior to negotiations.(2)

States use a variety of approaches to select providers and plans through competitive bidding. They may develop a preset range and contract with any provider whose bid falls within that range; they may award contracts based on the lowest bid; or they may use specific standards relating to quality and access. Providers may be encouraged to exceed these by using quality and access criteria to evaluate the proposals.

Pros and Cons

Pros

Using market forces to set rates can lower payment levels and result in rates that more accurately reflect the actual costs of services than rates based on fee-for service data.

Selective contracting can be used to secure services in underserved areas because the state finds a service provider for the area rather than waiting for providers to go there on their own.

The state can use selective contracting to secure an appropriate number of providers for services where an excess number of providers exist.

Cons

Some providers may choose not to participate in the Medicaid service system if they have to compete on price or quality.

Lack of participation and true competition in the bidding process may lead to an inadequate supply of providers or lower overall quality of care for Medicaid recipients.

The state must ensure that access or quality is not adversely affected by the contracting process.

Medicaid patients must have a choice among providers. If a state lacks the capacity to guarantee choice under a selective contracting arrangement, such contracting is not a viable option for the state.

Selective contracting requires quality measures. If a state does not have the capacity to develop or monitor such measures on a sustained basis, selective contracting is not a viable option for the state

Awarding contracts to different providers over time may lead to discontinuity of care.

Negotiations may be burdensome and administrative costs may be high.

State Experience

Many states rely on some form of competitive bidding when contracting with managed care plans for Medicaid.(3) The oldest Medicaid managed care plan, Arizona Health Care Cost Containment System (AHCCCS), used competitive bidding to contain costs in its Medicaid managed care program for 15 years. Arizona used independent actuaries to establish bid ranges for capitation rates based on utilization, cost and profit data from health plans. Plans could submit an initial bid and receive feedback from AHCCCS before the plan submitted its final bid. The state then awarded contracts on the basis of initial and final bids, prior performance, provider network and services, geographic location, and other criteria. The state encouraged lower bids by assigning more beneficiaries to the lowest cost plans. This approach initially helped Arizona contain costs. Studies showed that the state's acute care program costs were, on average, 7 percent less per year during the first 11 years of the AHCCCS program than the traditional fee-for-service Medicaid program(4) and the state saved millions of dollars in acute care costs.(5) In recent years, however, as many plans began to leave the Medicaid market because of low payment rates and little profitability, Arizona has shifted its approach from a competitive bidding process to an open bidding process. Since 1997, plans respond to requests for proposals (RPFs) with bids that include capitation rates segregated by geographic service area. AHCCCS makes assessments based on the plans' ability to meet financial and operational requirements. The state now awards fewer contracts for longer periods.

Selective contracting has been used to purchase other services as well. Oregon uses a transportation brokerage in the Portland area that has increased access while producing dollar savings of 15 percent.(6) Colorado used competitive bidding to purchase Medicaid mental health services in 1996 and saved about $6.5 million.(7) It plans to contract for transplanting services for which only bids that are at least 5 percent below its current estimated per case amount will be accepted.(8) Vermont has used selective contracting to obtain oxygen and respiratory equipment. Idaho and Kansas have selectively contracted to obtain transportation and nursing home services, respectively.(9)

Design and Policy Issues

What is the goal of this strategy in the state? Is it to

Contain costs?

Enhance patient access to services?

Control over utilization and reduce fraud?

When switching from a fee-for-service "any willing provider" model to a selective contracting or a capitated model, what rates or rate ranges are appropriate? States can use fee-for-service data or contract with outside actuaries to determine appropriate rates. When determining rates, it is important to consider service utilization, administrative costs, risk adjustments and carve-outs. An upper payment limit (UPL) restricts the ability of the state to pay more than fee-for-service rates for comparable populations.

Is it feasible for the state to use a competitive bidding process to select health plans or to buy particular services in its fee-for-service system? In states where currently rates are considered too low, providers may lack the incentive to make competitive bids or even participate in Medicaid. In a capitated managed care arrangement, higher initial rates, mandatory enrollment, risk-sharing arrangements, and auto-assignment may encourage participation and lower bids. To ensure that quality and access are not compromised, the state can use criteria such as size of network, geographic location, and patient satisfaction in awarding contracts.

Notes

1 Holahan, Rangerajan, and Schimmer, National Survey, See http://newfederalism.urban.org/html/occa26.html

2 Ibid.

3 Ibid.

4 "The Arizona Health Care Cost Containment System: 2001," See http://www.ahcccs.state.az.us

5 U.S. General Accounting Office, Arizona Medicaid: Competition Among Managed Care Plans Lowers Program Costs (GAO/HEHS-96-2) (Washington, D.C.: GAO, 1996).

6 Community Transportation Association of America, Managing Medicaid Transportation: A Manual Examining Innovative Service Delivery Models Under State Medicaid Managed Care Plans (Washington, D.C.: CTAA, 1997). See http://www.ctaa.org/pubs/medicaid

7 Colorado Office of State Auditor, Department of Health Care Policy and Financing Colorado Medicaid Program: Managed Care Performance Audit, (Denver: Office of State Auditor, 1997). See http://www.state.co.us/gov_dir/audit_dir

8 Janet P. Barber, "Selective Contracting for Medicaid Nursing Home Beds," Florida Health Care Journal, (January 2000). See http://www.floridahealthstat.com/

9 Texas Comptroller of Public Accounts, HHS 36: Use Selective Contracting for Some Medicaid Services, (Austin: Comptroller of Public Accounts, 1997). See http://www.cpa.state.tx.us/tpr/tpr4/c2.hhs/c236.html

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Strategy 10: Selective Contracting

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Description of Strategy

Pros and Cons

Pros

Cons

State Experience

Design and Policy Issues

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Notes

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