By Christopher Flavelle, Bloomberg Government health-care policy analyst

While the battle over President Barack Obama’s health-care overhaul continues to hold the country’s attention, a separate shift is underway in America’s health-care system, with potentially far-reaching consequences of its own, according to a Bloomberg Government Study, “Managed-Care Push Not Explained by Medicaid Cost Growth Alone” (subscription required), the first in a three-part series looking at the dynamics of managed care in the Medicaid system.  State policymakers, caught between stagnant tax revenue and increasing spending demands, are looking for new ways to reduce the cost of Medicaid, the health program for the poor and disabled jointly financed by states and the federal government.

As a result of these pressures, states are seeking to move more of their Medicaid populations out of traditional, fee-for-service coverage, in which health costs are paid directly to providers by the state, and into managed-care plans run by private insurers. That move is a potential boon for insurance companies: In 2010, 16 million people, or 29 percent of all Medicaid beneficiaries, weren’t enrolled in managed-care plans. Moving those remaining beneficiaries to managed-care plans would increase revenue for insurers. The stakes are significant: Medicaid spending will reach an estimated $456.8 billion in 2012, or 16 percent of all health-care expenditures.


In return for covering more beneficiaries, those plans offer the opportunity to control the cost of state Medicaid programs. In the context of Medicaid managed care, cost control means two things: lower spending, through some combination of better care coordination, reduced use of health-care services, and lower payments to providers; and more predictable spending, since state governments can negotiate payments with health plans at the beginning of the budget year and lock in those payments

The first installment of this three-part Bloomberg Government Study examines the forces driving states to move more of their Medicaid populations into privately run insurance plans. If states execute that shift, it will boost the revenue of managed-care plans, while probably reducing the revenue of hospitals, doctors and other health-care providers.  A key finding of the study shows that growth in state Medicaid spending has been more constrained than the public statements by governors suggest, with per-capita spending growing only slightly faster than inflation. But other factors are pushing states toward greater enrollment in managed-care plans, specifically the end of enhanced federal Medicaid contributions that were part of the 2009 stimulus package and expanded Medicaid enrollment as part of the 2010 federal health overhaul, among others.  Finally the study looks at changes in managed-care enrollment and spending in the five largest states.

The second and third parts of this study will examine the risks facing insurers as they try to take advantage of this evolving market.