The Public Policy Institute, formed in 1985, is part of the Public Affairs Group of the AARP. One of the missions of the Institute is to foster research and analysis on public policy issues of interest to older Americans. This paper represents part of that effort.

The views expressed herein are for information, debate, and discussion, and do not necessarily represent formal policies of the Association.

2001, AARP. Reprinting with permission only. AARP, 601 E Street, N.W., Washington, DC 20049

#2001-03

March 2001

Capitated Payment of Medicaid Long-Term Care for Older Americans:

An Analysis of Current Methods

by Richard Kronick, Ph.D.

and Tony Dreyfus, MCP

ACKNOWLEDGMENTS We would like to thank numerous people who contributed to our understanding of capitation for long-term care: Susan Barth of the New York Department of Health; Pam Coleman and Bill Farnsworth of Texas; Tom Hamilton and Tom Lawless of Wisconsin; Bob Hurley of the Medical College of Virginia; Jim Lubitz, Don Sherwood, and Noemi Rudolph of HCFA; Joelyn Malone and Pam Parker of Minnesota; Hunter McKay of the Office of the Assistant Secretary for Planning and Evaluation; Mark Meiners of the University of Maryland Center on Aging; Dan Milne and Reid Reynolds of Colorado; Erin Nagy of the American Public Human Services Association; Foster Northrup of William M. Mercer, Inc.; Chris Perrone of Massachusetts; Paul Saucier of the Muskie Institute, Maine; Jim Verdier of Mathematica. We would also like to thank Janet O'Keeffe and Jane Tilly, who were formerly employed at AARP, and Joyce Dubow, John Luehrs and others presently at AARP for their work in conceptualizing and revising the paper.

TABLE OF CONTENTS Foreword ......................................................................................................................................... i Executive Summary ...................................................................................................................... ii Introduction ................................................................................................................................... 1 I. The Growing Interest in Capitating Long-Term Care .............................................................. 1

Integrating Acute and Long-Term Care Services Under a Capitated Approach................. 3 II. Current Payment Methods for Long-term Care......................................................................... 4

Nursing Home Care............................................................................................................. 4 Home and Community-Based Services............................................................................... 5

III. Setting Capitated Payment Rates for Long-Term Care............................................................ 7

Defining the Comparison Group......................................................................................... 7 Calculating Expenditures per Eligible Month..................................................................... 8 Adjusting the Cost Experience............................................................................................ 8

IV. Policy Considerations in Moving to a Capitated Payment Approach for

Long-Term Care.................................................................................................................. 9 Defining the Comparable Population−Policy Implications .............................................. 10 Facing the Challenge of Serving Additional Older Beneficiaries..................................... 12 Conclusion: Evaluating Whether to Capitate Long-Term Care ........................................ 12

Appendix. Case Examples of Capitated Payment Systems for Long-Term Care ....................... 14

The Arizona Long-Term Care System.............................................................................. 14 The Program of All-Inclusive Care for the Elderly........................................................... 15 Minnesota Senior Health Options ..................................................................................... 17 The Texas Star+Plus Program .......................................................................................... 18

Endnotes....................................................................................................................................... 26 References .................................................................................................................................... 29

List of Tables

Table 1............................................................................................................................................. 6 Table 2............................................................................................................................................. 6 Table 3........................................................................................................................................... 20 Table 4........................................................................................................................................... 22 Table 5........................................................................................................................................... 23

i

FOREWORD

In recent years there has been a shift in the delivery of long-term care services from institutions to the home and community. The reason is two-fold. First, home and community- based care has the potential to be more cost effective. Second, long-term care recipients prefer to remain in their homes and avoid institutional settings. Notwithstanding the benefits of home care, programmatic limitations in Medicaid hamper the substitution of home care for institutional care for Medicaid beneficiaries.

As the number of individuals over age 85 increases as a percentage of the U.S. population, it is likely that there will be a significant rise in the demand for long-term care services. In an effort to restrain expenditure growth and improve services, state Medicaid programs have shown an increasing interest in developing new methods of long-term care financing. One approach is to capitate long-term care, either on its own or in an integrated system of acute and long-term care. Under a capitated system, states would have greater flexibility to provide long-term care in less costly home and community-based settings, while controlling long-term care expenditures.

AARP’s Public Policy Institute initiated this study to obtain information about current efforts to capitate long-term care. This report provides a discussion of several important considerations that policymakers need to weigh when deciding whether or not to adopt a capitated approach for financing long-term care. It also describes a variety of efforts currently underway to use capitated long-term care financing. Although this report does not provide a recommendation about the appropriateness of capitating long-term care, it does provide a framework for considering the costs and benefits, thus enhancing the knowledge base that policymakers can turn to when evaluating long-term care financing methods.

Rick Kronick is an Associate Professor in the Department of Family and Preventive Medicine at the University of California San Diego. He has assisted state Medicaid programs in the design and implementation of risk-adjusted payment systems for HMOs. Tony Dreyfus is an independent consultant with broad experience in the study of health care financing issues.

Stephanie L. Bernell, Ph.D. Senior Policy Advisor

AARP Public Policy Institute

ii

EXECUTIVE SUMMARY Background

The number of older Americans, who are at greatest risk of needing long-term care (LTC)

services, will rise steadily over the next decades. Many individuals will clearly need services provided in a nursing home. However, for many, services could be provided effectively in the home or community, which are by and large preferred settings. Unfortunately, due to limitations within the Medicaid program, there is an institutional bias towards providing services in nursing homes.

Without policy changes, the share of state budgets devoted to LTC for older persons — mostly nursing home care — is expected to increase over the next 20 years from its current level of about 4 percent to about 8 percent. Consequently, state Medicaid programs have shown increasing interest in capitated LTC financing. If LTC capitation provides an incentive to serve people in less costly, preferred home and community-based (HCB) settings, then it has the potential to improve the availability of services, improve consumer satisfaction, and decrease state LTC expenditures. One approach is to capitate LTC on its own, while a second is to capitate an integrated system of acute and long-term care.

The few programs that currently capitate LTC — for example, those in Arizona and

Texas — aim to facilitate flexibility in the provision of services, decrease reliance on nursing homes, and control expenditure growth. Most states already use HCB services waiver programs in an attempt to achieve the same goals. However, the advantages of LTC capitation over current approaches to paying for long-term care have not yet been clearly demonstrated. In addition, LTC capitation raises concerns that such financing could lower quality and inappropriately restrict services.

Purpose

The purpose of this paper is to provide information on long-term care capitation that will

aid policymakers in assessing this approach to LTC payment for all types of LTC services. The paper describes and assesses methods that states use to set long-term care capitation rates. It also addresses the benefits and challenges involved in capitating long-term care. Methodology

The paper is based on a review of the published LTC literature and official documents concerning current programs of capitated long-term care. The authors also conducted in-depth interviews with more than 20 informants from state and federal government and elsewhere.

iii

Discussion

States already have considerable experience in two areas that are closely related to capitating LTC: accounting for case mix as part of nursing home payments, and providing HCB services through waiver programs.

Almost all methods of setting capitated rates for LTC base the rate on the cost experience

of a group of people comparable to those projected to be served in the capitated program. Identifying the comparison group is the most challenging step in the rate-setting process.

A key beneficiary characteristic used for capitated LTC rate setting is whether individuals’ health conditions and functional limitations would make them eligible for nursing home care. States vary greatly in how they assess the need for nursing home care, with some requiring only functional limitations, others requiring nursing needs, and others a combination of both. The level of functional impairment required also varies by state, but a need for assistance in at least two or three activities of daily living is common.

To calculate capitated LTC rates for beneficiaries who are nursing home-eligible, states

use various blends of the expenditures for nursing home residents and nursing home-eligible beneficiaries living in the community. In most states, expenditures for people in nursing homes are two to three times the expenditures in waiver programs, creating a wide range in which capitated rates could fall.

In setting payment rates, states must decide which services will be covered, calculate

projected expenditures per eligible month, and adjust the cost experience for additional factors, such as inflation, managed care savings, recent changes in the Medicaid program, and beneficiary cost-sharing. Conclusions

States that pursue capitation of LTC must carefully consider several questions. What advantages does capitation offer over established HCB waiver programs? How can states use capitation to extend services to the many older individuals living in the community who could qualify as nursing home eligible without placing greater demands on the state budget too quickly? If states choose to adopt a capitated approach, how will they deal with the substantial state administrative effort that will be required to establish and manage the program and how will they address concerns that capitation might lead to underservice?

The central policy question of whether capitating LTC services is a good idea will need to be answered in part with more practical experience, including more years with a large number of enrollees. However, existing programs, such as the Program of All-Inclusive Care for the Elderly and programs in Arizona, Minnesota, and Texas, which are described in the report, already

iv

provide some useful information about the kinds of rates and incentives that certain rate setting approaches yield. These capitated LTC programs deserve close observation.

States with the broader goal of integrating acute and LTC in a capitated program for persons age 65 and older face significant difficulty, however, because such integration requires Medicare funds to cover the costs of acute care. The federal government prohibits the mandatory enrollment of Medicaid beneficiaries in health maintenance organizations for Medicare-covered acute care services, which prevents states from creating large integrated capitated programs. Additionally, beneficiaries eligible for both Medicare and Medicaid appear reluctant to enroll voluntarily in programs where they will lose their freedom to choose providers. As a result, prospects for the broader goal of capitating LTC with acute care are mixed. It seems likely that wider experiences of separately capitating acute care for older Medicare beneficiaries and capitating LTC for Medicaid beneficiaries is needed before efforts at full integration can proceed on a larger scale.

1

CAPITATED PAYMENT OF MEDICAID LONG-TERM CARE FOR OLDER AMERICANS: AN ANALYSIS OF CURRENT METHODS

INTRODUCTION

The number of older Americans, as a percentage of the population, is rising steadily. As a result, over the next several decades, many older persons will need long-term care (LTC) services. While some individuals will need services provided in the nursing home, many others can be served effectively in the home or community, the setting most people prefer. Limitations within the Medicaid program, however, create a bias towards providing services in institutional settings.

State programs have shown increasing interest in using capitated financing to pay for long-term care.1 Based on their experience in using a capitated payment system in acute care settings, states view this approach to financing as a possible means to decrease reliance on nursing homes as well as restrain expenditure growth. If LTC capitation provides an incentive to serve people in less costly, preferred home and community-based (HCB) settings, it may also have the potential to improve the availability of services, increase consumer satisfaction, and decrease state long-term care expenditures.

The purpose of this paper is to provide a basic, non-technical framework for considering LTC capitation. Section I provides the policy and program context for the increased interest in LTC capitation. Section II describes how states traditionally pay for long-term care. Section III describes the methods states use to calculate rates for LTC under capitated arrangements, and Section IV discusses several key considerations policymakers will need to weigh in deciding to move to a capitated approach for financing long-term care. The Appendix describes the efforts of several programs and states to develop capitated financing approaches for LTC services. These include the Program of All-Inclusive Care for the Elderly (PACE) and programs in Arizona, Minnesota, and Texas. I. THE GROWING INTEREST IN CAPITATING LONG-TERM CARE

Long-Term care is currently provided in two major ways – nursing home services and HCB services. Care in a nursing facility is a federally mandated service for state Medicaid programs, whereas states decide whether and how much to cover HCB services. Home and community-based programs have grown significantly in recent years, although current public expenditures for LTC are devoted mostly to nursing home care. Of the $59 billion in national Medicaid expenditures in 1998 for LTC, the vast majority, about 58 percent, was for institutional care 25 percent going to home care and close to 17 percent going to intermediate care facilities for the mentally retarded and developmentally disabled (HCFA, 2000).

2

Currently, approximately as many older persons with limitations in three or more activities of daily living (ADLs), such as bathing, dressing, and toileting, live in the community as live in nursing homes, and many of these individuals would likely qualify as nursing home-eligible.2 In addition, an equally large group of older persons have fewer but still significant functional impairments; some might also be nursing home-eligible depending on their condition and on the eligibility rules in their state. However, many individuals who meet Medicaid financial eligibility requirements are not receiving nursing home or HCB care because they have not been evaluated for the program or there is insufficient space in the programs to accommodate them. Even many impaired older persons in the community who would not meet Medicaid’s financial eligibility requirements would and could benefit greatly from supportive services in their homes or the community.3 In the absence of HCB services, only a strong preference to avoid the nursing home and the support of family, friends, and some formal services keep many impaired older persons in the community.

Much of the interest in capitating the payment for LTC services stems from its potential as a payment mechanism that could facilitate a more appropriate balance of HCB and nursing home services. For example, some older Medicaid eligible persons who need a nursing home level of care prefer to receive services in their own homes, but cannot obtain services because all the state-funded slots designated for these services are filled. A managed care organization receiving capitation that includes payment for both HCB services and nursing home services would not be confronted with this problem. It could provide the enrollee with needed HCB services at a lower cost than that required for nursing home services if it could spend resources creatively on new and more efficient approaches to providing needed services.

As much as combining LTC services under a capitated payment system has created hope for improving the availability of services in preferred settings and constraining expenditures, it has also raised concerns. One of these concerns is the incentive created by capitation to stint on necessary services. Under the typical full-risk arrangements of capitated plans, there is an incentive to deliver fewer services in order to decrease expenditures. Indeed, much of the current ill-will toward managed care stems from the concern that health maintenance organizations (HMOs) limit access to needed services in order to increase profits. If payment for LTC services is capitated, then the incentive to under-serve could be extended to a population who are often vulnerable and less able to advocate or make decisions for themselves than persons in managed care health plans.

State policymakers also need to understand that capitation will not easily restrain growth in public LTC expenditures. When states implement programs that capitate acute care for younger Medicaid beneficiaries, budget analysts have usually assumed that savings will occur in the next year's budget. In contrast, LTC capitation does not promise substantial short-run savings, in part, because of Medicaid's already fairly economical purchasing of LTC and in part because of substantial unmet needs among beneficiaries for long-term care services. Although HCB services can often be provided to older persons at a lower cost than nursing home services, experience has shown that many individuals who are nursing home-eligible, but who elected not to go into a nursing home, might be attracted to programs that offer services in the community.

3

Thus, states should view LTC capitation as a possible long-run method of restraining expenditures and encouraging the growth of high quality, community based services, but not as a method of saving money in the short term. Integrating Acute and Long-Term Care Services Under a Capitated Approach

The potential for LTC capitation to shift spending from nursing facilities to HCB settings, to restrain expenditures, and to meet the needs of a growing population in the future depends on the scope of services included in the capitated payment. In general, a broader range of services included under capitation should create the possibility for the development of more comprehensive and coordinated systems. This is why some programs have implemented a capitation approach that goes beyond LTC services alone. This broader approach integrates acute care covered by Medicare with LTC provided by Medicaid. A concerted system of medical, therapeutic, and supportive services could help many older persons enjoy better health, functioning, and independence than they do under the current separate systems for acute and long-term care. The range of services would be provided whenever possible in the community and whenever necessary in hospitals and nursing homes according to the needs of the individual, not the dictates of the source of coverage. More resources devoted to supportive services, preventive care, and timely primary care might reduce the need for acute hospitalization and reduce or postpone the need for nursing home care.

This larger pooling of acute and LTC dollars represents some of the more far-reaching hopes for creating a coordinated approach to care for older persons. The interest in capitating an integrated acute and LTC system stems from states’ concern that the division of responsibility for acute and long-term care services between Medicare and Medicaid, and the resulting cost shifting between the two programs, may lead to duplicative and avoidable expenses, poor care coordination, and poor outcomes. The current payment arrangements do not foster aggressive preventive care and timely primary care that might improve health status, save money, and reduce use of nursing homes. The capitation of LTC in integrated systems is seen as a method that has the potential to improve both health and long-term care outcomes.

In addition, capitation's potential to improve services and restrain expenditure growth has more promise for an integrated package of acute and long-term care than for LTC alone. The financing of long-term care through Medicaid has been fairly economical (Wiener and Stevenson 1998b, p.98), and so LTC capitation offers much less potential for savings than capitation of the acute care fee-for-service system, which grew large and comfortable with third-party insurance and unmanaged specialist, hospital, and high-technology care.

States with the broader goal of integrating acute and LTC in a capitated program for persons age 65 and older face significant difficulty, however, because such integration requires Medicare funds to cover the costs of acute care. The federal government prohibits the mandatory enrollment of Medicaid beneficiaries in HMOs for Medicare-covered acute care services, which prevents states from creating large integrated capitated programs.4 Additionally, beneficiaries eligible for both Medicare and Medicaid appear reluctant to enroll voluntarily in programs where

4

they will lose their freedom to choose providers. As a result, prospects for the broader goal of capitating LTC care so as to integrate it with acute care are mixed.

The Medicare program has explored the idea of integrating acute care and LTC through a demonstration program. The national Social Health Maintenance Organization (S/HMO) demonstration program was initiated in the mid-1980s to test the integration of acute care and a prescribed set of LTC services within a capitated managed-care framework. Under the demonstration, the S/HMO provides the full range of Medicare benefits offered by standard HMOs plus additional limited LTC benefits including some nursing home care, and a full range of HCB services such as homemaker services, personal care services, adult day care, and respite care. The initial evaluation found that although S/HMOs offered long-term care services, they did not develop a well-coordinated system of care; in part because many physicians were unaware of the LTC benefit package. The evaluation also found that S/HMO enrollees with functional impairments were less satisfied than either unimpaired S/HMO enrollees or functionally impaired beneficiaries in the traditional Medicare program (Newcomer et al. 1994)

The Congress mandated the second-generation S/HMO demonstration in 1990. This newer demonstration embraces similar objectives, but refines the financing methods of the first S/HMOs and improves the benefit design. Specifically, there is a greater emphasis placed on geriatric care, and Medicare capitation rates are risk adjusted for enrollee’s reported health status, ADL limitations, and other characteristics. The Health Care Financing Administration (HCFA) chose six organizations to participate in the second-generation program, however only one, Health Plan of Nevada, has become active. II. CURRENT PAYMENT METHODS FOR LONG-TERM CARE

Almost all capitated programs use the enrollment and expenditure experience of a comparable group of non-capitated beneficiaries as the foundation for setting payment rates. Thus, it is instructive to review current methods used to pay for LTC as background for understanding the rate setting calculations and policy decisions that will be necessary if states decide to pursue a capitated option for financing long-term care for their older residents. Nursing Home Care

Nursing homes provide skilled nursing care, protective oversight, rehabilitative services, and room and board to individuals who, because of their mental or physical condition, require care and services that can be obtained most readily in institutional facilities. States generally pay for nursing home care through a set payment for each day of care provided, averaging $99 per day in 2001. In many states, the per diem Medicaid payments to nursing homes vary according to several factors. First, the per diem can vary by facility, with different nursing homes having rates that depend to some degree on their cost experience. Thus, if a nursing home spends more than the average nursing home in a state, it will get higher-than-average payments in the

5

following year. This facility-specific approach provides more money to nursing homes that provide better amenities. Often, these are homes with a high proportion of private pay residents.

Second, the per diem can vary according to the case mix or level of need of the residents, with higher per diem rates paid for the care of residents who are evaluated as needing greater levels of services. Higher payments to nursing homes with a more severe case mix is a key technique used by some states to encourage nursing homes to assume responsibility for older persons with greater needs. Case-mix adjustment can also reduce the likelihood that nursing homes will offer substandard care to older persons with above-average needs. States that do not use case-mix reimbursement systems often have other systems of payment that recognize to some degree variation in the level of care needed. For example, a state may pay one rate for a skilled level of care and another rate for lower levels of care.5 Home and Community-Based Services

Home and community-based care programs provide a wide range of services, including personal care to assist with bathing, dressing, toileting and other ADLs; adult day health care; respite care; homemaking; and nursing or rehabilitative care, such as assistance with medications, monitoring of health status, and physical therapy. Medicaid typically pays for these services on a fee-for-service basis.

States can provide HCB services through (1) the regular Medicaid program, (2) programs funded solely by states, or (3) programs established through waivers of Medicaid regulations. Under the regular Medicaid program, all states must cover home health care for persons age 21 and older who meet nursing home functional eligibility criteria; some cover limited amounts of personal care and other HCB services as well. In solely state-funded programs, the state can extend eligibility to people who do not qualify for Medicaid; total spending for such programs was only $1.2 billion in 1997 (Wiener and Stevenson 1998b, p.89). Approximately 110,000 persons are served in waiver programs exclusively for older persons, and an additional 200,000 are served in waiver programs that care for both older and disabled persons. Expenditures on these 310,000 persons in 1997 were approximately $2 billion dollars—a small fraction of the over $30 billion in Medicaid expenditures for all long-term care (i.e., nursing homes and HCB) for older persons.

Home and community-based waiver programs represent an important method for states to develop alternatives to institutional care. With a Section 1915(c) waiver, a state can expand eligibility for Medicaid LTC services in the community by applying a more liberal methodology in determining financial eligibility. The waiver also allows the state to set a strict limit on the number of individuals it will serve and the amount of dollars it will spend per participant. The HCB waiver programs stand in sharp contrast to acute care. States have little control over the number of acute care service users or the cost per acute care user in fee-for-service programs. In the waiver programs, states can control both the number of program participants and the cost per person. The ability to control the overall size of the waiver programs has reduced states'

6

concerns that the availability of LTC services outside of nursing homes will lead to an uncontrolled increase in demands for service.

Table 1 provides summary data on waiver programs and Table 2 presents more detailed state data on waiver programs that serve older persons. Table 1. Numbers Served and Expenditures in Home and Community-Based Waiver Programs Waiver Type

Number Served

Expenditures (million $)

Annual Per Capita Cost of Waiver Program

Annual Per Capita Cost of Institutional Alternative

Per Capita Waiver Cost/ Per Capita Institutional Alternative

Older 110,521 $493 $8,450 $22,260 38% Older and Disabled 196,134 $1,499 $11,440 $23,170 49% Mental Retardation 175,901 $4,638 $35,290 $87,230 40% Other 33,257 $367 $19,690 $40,540 49% Total 515,813 $6,997 $19,460 $45,940 42% Source: Authors' analysis of American Public Human Services Association,1915(c) Database, 1997. Averages are weighted by the number served. Table 2. Number Served and Expenditures for Older Participants of Waiver Program

State

Number Served

Annual Per Capita Cost of Waiver

Program

Annual Per

Capita Cost of Institutional Alternative

Per Capita Waiver Cost/ Per Capita Institutional

Alternative Alaska 411 $23,796 $62,171 38% Arkansas 7,771 $4,677 $13,037 36% California 8,004 $9,478 $20,121 47% Connecticut 13,026 $14,136 $36,737 38% Florida 4,476 $18,374 $25,765 71% Illinois 16,448 $4,685 $20,853 22% Iowa 2,874 $11,818 $14,703 80% Kansas 5,662 $9,359 $16,741 56% Massachusetts 3,174 $4,137 $26,586 16% Minnesota 6,923 $8,537 $21,970 39% Missouri 18,946 $5,805 $17,165 34% Ohio 19,666 $7,762 $23,246 33% Pennsylvania 1,298 $14,758 $28,881 51% Rhode Island 600 $4,446 $34,000 13% Utah 542 $9,680 $19,886 49% Average 7,321 $8,450 $22,260 38% Source: Authors’ analysis of American Public Human Services Association 1915(c) Database, 1997. Averages are weighted by number served.

7

A notable feature of the HCB waiver program for older individuals has been that their average annual expenditures of about $8,500 per capita are only about 40 percent of the costs of institutional care. Similarly, the HCB waiver program expenditures for older and disabled individuals are about 50 percent of the costs of institutional care. Although federal waiver rules limit waiver expenditures to be no higher than institutional costs, actual waiver expenditures are much lower. This level of expenditure is probably achieved, in part, through protocols for state case managers and contracts with counties or other agencies that administer the waiver program, and in part because the LTC needs of community-based enrollees are perhaps less than those of nursing home residents. III. SETTING CAPITATED PAYMENT RATES FOR LONG-TERM CARE

Setting a capitated payment rate involves several steps, all of which incorporate the enrollment and expenditure experience of a comparison group. Federal Medicaid regulations stipulate that states may not spend more in the new capitated program than the amount the state would spend on beneficiaries through traditional fee-for-service payments. Even without such federal regulation, budget-conscious state legislators and Medicaid administrators would generally not want to spend more on a capitated program than they would on non-capitated payments. Defining the Comparison Group

The initial and most challenging step in rate setting is to define a group that is comparable to the group that will be served by the capitated program—the “comparison group.” The closeness of the final capitation rate to what otherwise would have been spent will largely depend upon how well the comparison group approximates the group in the capitated program.

All capitated LTC programs to date either cover nursing home-eligible persons only or have a special rate for them in programs that cover non-nursing home eligible persons as well. To define the comparison group, ideally, a state would have data on all nursing home eligible individuals (in other words, persons who would meet the nursing home eligibility criteria if they were evaluated). However, states have data only for nursing home eligible persons who are currently in nursing homes and persons who are in HCB waiver programs. States therefore use these groups' expenditures to estimate the expenditures for all beneficiaries who are nursing home-eligible.

In fee-for-service, there are two main sources of variation in the amount of LTC expenditure: level of need and site of care. Comparing beneficiaries with the same level of need, expenditures for those in nursing homes are greater, on average, than for similar beneficiaries in the community. On average, however, beneficiaries in nursing homes have greater needs than nursing home eligible beneficiaries who remain in the community. Therefore, when setting rates for capitated programs, states need to consider both program enrollees' level of need as well as the likely site of care. If most program enrollees would likely receive services in the community

8

rather than in a nursing home, then payment close to the level of waiver expenditures is likely appropriate. Conversely, if substantial numbers of enrollees would likely be in nursing homes in the absence of the capitated program, then payment closer to the nursing home level is appropriate. In most states, per capita expenditures for people in nursing homes are two to three times expenditures in waiver programs, creating a wide range in which the rate could fall.

In capitated LTC, adjusting the rate to take into account the needs of the beneficiaries could play a key role in focusing more services on older persons with greater needs. Effective risk adjustment for LTC could do much to allay concerns among payers and plans that adverse selection of beneficiaries into plans could lead to large overpayments or underpayments. Medicare's experience with voluntary enrollment in HMOs for acute care has shown that overpayments can result when healthier-than-average beneficiaries enroll disproportionately. Plans that design attractive systems have reason to fear drawing an adverse selection of frail beneficiaries who will need a greater-than-average level of services.

The goal of moving care from institutions to the community inevitably complicates comparability. In most states, there are many Medicaid beneficiaries in the community, but not in waiver programs, who would be nursing home eligible if their levels of need were evaluated. A program to serve more nursing home eligible people in the community can attract many people who are not as impaired as those actually in nursing homes. Calculating Expenditures per Eligible Month

After deciding which services capitated plans will provide, the state must identify the state’s expenditures for these services for the comparison group. These expenditures must then be divided by the length of time that beneficiaries are eligible to receive services — thus calculating expenditures per eligible month.6 Adjusting the Cost Experience

Rate setters must adjust the cost experience to account for several additional factors.

Inflation. The cost experience for the comparison group needs to be adjusted for any anticipated differences between the costs for the comparison group and the group for which the capitated rate will be paid. For example, if services to the comparison group were delivered in 1998 and the services for the capitated group are delivered in 2000, then rate setters would typically increase the expenditures made for the comparison group by a trend factor to adjust for anticipated inflation.

Determining the trend factor is often more art than science, and is an area with substantial flexibility. The trend factor can rest on a projection of the medical component of the consumer price index, reflecting the expected increase in unit prices in the health care industry. Alternatively, it can be an estimate of the recent trend in Medicaid expenditures per eligible month.

9

Managed care savings. A second type of adjustment is commonly made to reflect

savings on fee-for-service expenditures that the state believes should be achieved through capitation. In setting rates for acute care, states commonly discount fee-for-service expenditures by 5 percent, but smaller or larger discounts can also be used.

Program changes. Adjustments are also made to reflect recent changes to the Medicaid program. For example, if the Medicaid program in 1999 had increased nursing home payments by 10 percent or agreed to pay for a new type of community-based service, the estimated effects of these changes on expenditures per eligible month would be incorporated into the rates.

Beneficiary share of cost. If the state is using actual expenditures in claims to calculate the costs of the comparison population, then the claims should already reflect the small contribution made by the beneficiary. However, if the state is using the nursing home rate to calculate its expenditures, it will have to subtract the beneficiaries’ average contribution from the rate to more accurately estimate state costs (PACE 1996, p.6-7). IV. POLICY CONSIDERATIONS IN MOVING TO A CAPITATED PAYMENT APPROACH FOR LONG-TERM CARE

The central policy question of whether capitating LTC services is a good idea will need to be answered in part with more practical experience, including more years with a large numbers of enrollees. However, existing efforts, such as the PACE program and programs in Arizona, Minnesota, and Texas, which are described in the Appendix, already provide some useful information about the kinds of rates and incentives that certain rate setting approaches yield. These programs to capitate LTC deserve close observation.

The new payment systems have various positive features. For example, the single rate for nursing home eligible beneficiaries regardless of where they reside, creates a strong incentive to provide services in the community. Minnesota's payment system shields plans from the full liability for nursing home care, but still encourages plans to provide care in the community through partial liability for nursing home care. Given the wide variation in need among beneficiaries who are nursing home eligible, it is difficult to set a single rate that is accurate when enrollment is voluntary.

States face no shortage of areas in which they can learn how to better serve older persons. For new programs to create real improvements in services for older persons, they must do far more than just capitate or just bring together Medicare and Medicaid money. Sustained learning and development efforts are needed both on the side of financing and administration and on the side of innovation in service delivery. States and health plans will have to learn more about a range of topics, such as the different mixes of professionals who can serve older persons who have different levels of frailty, alternative methods of communicating about new programs, and various ways to develop a role for consumer direction of services. More effective coordination

10

of supportive services such as older housing, meals, and transportation could also play an important role in improving services.

With all these difficulties, states that seek a better array of services from the Medicare and Medicaid dollars available are tackling an important challenge with a great potential benefit for older persons. The remainder of this section discusses in more detail several important issues that policymakers will need to consider as they decide whether and how to pursue a capitated approach to financing long-term care. The key rate setting difficulty of defining the comparable population is addressed first, followed by an examination of whether states can use capitation to extend services to the many nursing home-eligible people in the community without placing great demands on the state budget too quickly. Defining the Comparable Population−−−−Policy Implications

The rate setting challenge of identifying a group of people who are comparable to those who will be served in a capitated program has been met in various ways, especially for the key group of those who are eligible for nursing home services. As discussed in Section III, when setting payment amounts for these Medicaid beneficiaries, states must decide whether to pay the high amount spent on nursing home residents, the much lower amount spent on eligible beneficiaries in community-based waiver programs, or some amount in between.

Some existing capitation programs, such as PACE, have been paying at the high end, either at nursing home levels or at a blend of nursing home and waiver expenditures weighted strongly toward the nursing home. While these rates might be appropriate for the beneficiaries who typically enroll in PACE, they are much higher than most states are currently paying for the average beneficiary in an HCB waiver program. If states were to adopt the PACE rate setting methods for a capitated LTC program that covered all nursing home-eligible beneficiaries in the community, overall expenditures would increase significantly.

Other programs have generally adopted alternative approaches to determining capitation rates. Arizona blends nursing home and community-based expenditures using a target mix that slightly increases the community-based share over the previous year. The single rate appears to have stimulated contractors to increase community-based care, which probably has attracted additional enrollees more than it has diverted people from nursing homes.

Texas, by contrast, pays different rates for beneficiaries living in nursing homes than for eligible beneficiaries living in the community, with the rate for nursing home residents based on nursing home costs and the rate for community residents based on the expenditures in the waiver program. This approach may encourage a modest reorientation away from the nursing home and toward community-based services.

Minnesota bases its rates for beneficiaries in the community on waiver expenditures, but offers incentives to provide care in the community by requiring plans to cover the first six months of nursing home costs. A bonus paid for residents in the community who have moved

11

out of a nursing home also helps create incentives to shift services to the community. So far, however, few community-based beneficiaries have enrolled, and very few long-term nursing home residents have moved to the community.

All of the current rate setting techniques assume that non-capitated spending is at the right level and that the problem is finding the appropriate comparison group for the capitated program. But this assumption is certainly open to question. In some states, excess nursing home capacity may have led to levels of expenditure that were higher than appropriate, at least for those in nursing homes. On the other hand, in some states, low reimbursement rates and limits on covered services may have caused spending to fall below what might be desirable. In the short run, budget constraints and federal rules are likely to keep capitation rates fairly close to a fee-for-service equivalent. In the long run, data from plan experience may guide rate setters to depart substantially from the fee-for-service equivalent.

An important limitation of all these rate setting techniques appears to be the use of a single rate for nursing home-eligible beneficiaries living in the community. Nursing home eligibility alone is not a narrow enough category for use in widespread rate setting because this category includes people with very different levels of need. Other factors are needed to make better predictions about resource needs, including more detailed information on functional status, cognitive status, illness, living situation, and family supports.

Given the wide range of need among those receiving or eligible for nursing home care, a single rate could encourage adverse selection when beneficiaries can choose among plans (or between capitated plans and fee-for-service). In the same vein, each plan would be eager to enroll people with lesser needs, particularly those who are the least impaired in the community. Without some form of risk adjustment, plans might seek the easiest of community cases and avoid those who have greater LTC needs. As a result, a single rate might have limited effects in encouraging plans to bring new resources to the community, or to develop new methods of caring for more impaired people in the community.

To accomplish the goal of shifting resources through capitation, plans must have both the motivation and the resources to provide services in the community that will help keep people out of nursing homes. Covered services should include nursing home care and community care and the capitation rate should include nursing home costs and community service costs. The challenge for rate setting is that the population served must also include both nursing home residents and community residents, two groups that include people with very different levels of need.

Government and other funders of research should support larger-scale efforts to establish reliable risk adjustment methods for LTC outside of institutions. The federal government has been encouraged to improve risk adjustment of Medicare payment for frail older persons (MedPAC 1999, p.92), but separate work is needed in this area for long-term care. Existing methods of evaluating case mix in nursing homes, rehabilitation hospitals, and home health care

12

present a strong basis from which to work, but these methods need to be extended to reliably assess health and functional status among people with more modest levels of need. Facing the Challenge of Serving Additional Older Beneficiaries

States will face an additional challenge of providing services for the many Medicaid beneficiaries living in the community who could meet the eligibility criteria for nursing home services, but who are not currently receiving waiver services. In some cases, waiver programs have no open slots and so have not been accepting new beneficiaries. In other cases, eligible beneficiaries have simply not applied for services.

For states that have substantial numbers of nursing home-eligible Medicaid beneficiaries living in the community and not served by the waiver program, creating a statewide capitated program without slot limits could lead to substantial increases in persons served and in expenditures. It is also possible that the additional people being served would have fewer needs on average than those already being served in the waiver, so that adjustment of rates by functional status would be needed to avoid overpayment.

States face a related challenge in serving the many community-based residents who have needs for supportive services but who are not nursing home eligible. Most capitated LTC programs enroll only nursing home eligible beneficiaries, but a few cover non-eligible beneficiaries, as well. The Texas and Minnesota programs allow non-nursing home eligible beneficiaries to enroll, but pay a single rate for all beneficiaries who are not nursing home eligible. This single rate discourages contractors from developing systems of care that would be attractive to those beneficiaries who are at risk of becoming eligible for nursing home services, but who have not yet passed the threshold. Good measures of need can help states to focus services on those who most need them and to adjust capitation rates so that providers face the appropriate incentives. Conclusion: Evaluating Whether to Capitate Long-Term Care

As noted in the Introduction, capitated LTC and the HCB waiver programs share important goals: meeting the needs of beneficiaries through a flexible array of community-based services, and delaying or preventing nursing home placement. Before embarking on an ambitious program to capitate LTC services, states should think carefully about what advantages capitation would bring over providing HCB services on a fee-for-service basis. Programs that use capitation to integrate acute and long-term care have clear potential advantages, but are likely to grow very slowly. The argument for capitating only LTC services is less compelling. Capitated LTC may outperform traditional HCB service programs if the capitated organization has more resources available than the traditional case manager or can use the available resources more creatively. Case managers of HCB services typically do not control the delivery of home health care services, while capitated long-term care programs typically do, and may be more effective in using them to support older persons in the community. Under fee for

13

service, Medicaid regulations may limit the effectiveness of public case managers, or service dollars may have been captured by politically influential agencies that are not creative in maintaining older persons in the community.

These potential advantages of capitation should be weighed against some disadvantages, including the substantial state administrative effort to establish and manage a capitated program and the concerns that capitation might lead to underservice. To realize the potential of shifting dollars from the nursing home to community-based services, capitated programs will have to overcome the political influence of the nursing home industry and substantive problems of implementation. Finally, creating a capitated program will require managed care organizations to become highly adept at LTC case management, much like the case managers who now work for Medicaid, county governments or area agencies on aging.

Capitating LTC may lead to improvements in service organization and effectiveness. But capitation also brings the risk of diminished quality. Without appropriate reimbursement rates that take into account the beneficiary’s level of need, capitation may do little to improve quality or restrain growth in LTC expenditures.

14

APPENDIX. CASE EXAMPLES OF CAPITATED PAYMENT SYSTEMS FOR LONG-TERM CARE

The following sections describe the efforts of several states and programs to develop capitated financing approaches for LTC services. Tables 3 and 4, which follow these descriptions, summarize the major elements of the programs and their rate setting methods. The Arizona Long Term Care System7

The Arizona Long Term Care System (ALTCS) was developed as part of the Arizona Health Care Cost Containment System, which was established in 1982. ALTCS began in 1989 and serves both older and younger persons with disabilities who are eligible for Medicaid covered nursing home care. ALTCS contracts for long-term care and Medicaid covered acute care with private contractors in most counties but uses county-operated LTC programs in the two most populous counties, Maricopa and Pima, which contain Phoenix and Tucson. As of June 2000, ALTCS enrolled just under 29,000 elderly and physically disabled (EPD) individuals, the largest capitated LTC program in the country and the only one that serves more than a few thousand beneficiaries.8 (The program also serves 10,000 enrollees with developmental disabilities, but services and rates for this group, which are overseen by the Arizona Department of Economic Security, are not discussed here.)

Among EPD beneficiaries, 82 percent are also eligible for Medicare, which pays for their acute care services, primarily on a fee-for-service basis. The federal government allows ALTCS to limit its coverage of copayments and deductibles to services rendered by providers in the ALTCS network. Beneficiaries thus have a strong financial incentive to join a Medicare HMO but are not required to do so.

The Arizona program provides an example of how a single rate paid for nursing home eligible beneficiaries — whether they are in a nursing home or in the community — can create a strong incentive for plans to provide services that help people stay in the community.

Contractors are paid the same rate for each enrolled beneficiary within a county. The rate is calculated in two basic steps. First, ALTCS determines the expected LTC expenditures per month for nursing home residents and for community-based residents. The expected monthly expenditures for nursing home and community-based residents are determined separately by county, primarily by calculating historical costs in the most recent base period and trending these forward. LTC expenditures for nursing home residents are much higher than those for HCB care: in a sample calculation, the state shows nursing home expenditures at $2,800 per month, with long-term care expenditures for community-based residents at $775 per month.

Second, ALTCS annually computes a blend of the nursing HCB expenditures. The blend's proportion of community-based expenditures is a target set by ALTCS staff, who typically assume that the contractor can slightly increase the historical share of community-based placements. In addition, contractors are paid for acute care based on historical expenditures

15

trended forward plus allowances for case management, administration, and a contribution to reserves or profit. In 1999, rates per month in Phoenix and Tucson were approximately $2,300 per enrollee and in other parts of the state approximately $2,000 per enrollee.

Payments are retroactively adjusted if the actual percentage of community-based placements differs by more than one-half of 1 percent from the target amount. If the actual percentage is above the target, then ALTCS recoups about 30 percent of the extra payments. Similarly, if community-based placements are below the target, ALTCS makes up 30 percent of the under-payment. Contractors have a strong incentive to maximize community-based placements, but get some protection if community placements fall short of the target.

Community-based placements have increased substantially since 1989. HCFA at first limited community-based placements to 5 percent of overall ALTCS enrollment, apparently out of concern that increased enrollment of community-based enrollees would increase program expenditures. HCFA progressively raised the limit on community-based placements, and recently eliminated it entirely. The proportion of ALTCS enrollees in the community is 42 percent.

Contractors have responded to the incentive to increase community-based placements by increasing community resources and the percentage of enrollees served in the community. ALTCS enrollment, including individuals with development disabilities, increased from approximately 14,000 in 1991 to 25,000 in 1998. This large enrollment growth suggests that the increase in the proportion of community-based placements has resulted primarily from an increase in the number of persons served rather than a decrease in the number of persons placed in nursing homes. However, data are not available to confirm this.

A distinguishing feature of ALTCS is the single contractor per county, which has simplified rate setting and eliminated the concern about risk selection among plans when determining payment rates. However, with only a single contractor, there is no incentive to compete for enrollees by providing high levels of service or quality. The legislature has recently directed ALTCS to conduct competitive bids in Maricopa and Pima counties. The awarding of multiple contracts after the bids will raise concerns about risk selection. The state will need to be careful when determining equitable payment rates for each contractor. The Program of All-Inclusive Care for the Elderly9

The Program of All-Inclusive Care for the Elderly (PACE) is the oldest and the most geographically widespread model for integrating acute and long-term care for older persons. PACE grew out of the On Lok program in San Francisco, which developed in the 1970s based on the concept of comprehensive health and support services based at day health centers for frail older persons living at home. A national demonstration, beginning in 1990, replicated the On Lok experience with nursing home eligible older persons.

16

The replication has been substantial, including twenty-five full sites around the country receiving Medicare and Medicaid capitation and another 7 "partial" sites with Medicaid capitation only. Given the number of sites, total enrollment is fairly small about 6,900 individuals at the end of 1999. The Balanced Budget Act of 1997 gave permanent status to the program, which may begin a period of more rapid growth, with up to 20 new sites allowed annually.

The current PACE model may face inherent size limits. PACE enrollment is voluntary, and requires enrollees to give up the wide choice of physicians and other providers available through traditional Medicare. PACE enrollees are expected to make frequent visits to the PACE centers to receive physician and other community-based services, such as adult day care. The low enrollment in PACE may reflect the model's limited appeal to frail older persons. Better marketing and more capital that will become available through for-profit PACE demonstration sites authorized in the Balanced Budget Act of 1997 may help PACE grow, but given the limitations noted above, it seems likely that PACE will continue as a niche provider.

PACE enrollees are all nursing home eligible, but over 90 percent are community residents. States take varying approaches to setting the Medicaid portion of the capitation, which is usually in the range of $1,500 to $3,000 per month (MedPAC 1998, p.116). In most states, PACE rates are based on nursing home costs with either no blending or only modest blending toward the costs of care in the community. For example, Illinois uses 75 percent of the nursing home rate and 25 percent of the community rate. The single rate provides a strong incentive for PACE sites to keep people in the community because nursing home costs are generally higher than HCB service costs. The PACE rates, which are tilted so strongly toward the nursing home costs, would probably be inappropriate for programs that serve a broader spectrum of community-based residents, rather than the extremely frail enrollees who appear to be attracted to the PACE model.

Most states do not adjust PACE payments for level of need, but New York and Wisconsin pay different rates for an intermediate level of care and a skilled nursing level of care (Rudolph and Lubitz 1999, p.10-11).10 Some observers have argued that the PACE rate should be adjusted downward to reflect the fact that the PACE program is not responsible for room costs or for most meal costs, which continue to be paid by PACE members themselves, often supported through public housing subsidies and the Supplemental Security Income program (Branch 1999).

The key challenge in setting a single Medicaid rate for the nursing home eligible people served by a PACE site is deciding whether the enrollees are truly comparable to nursing home residents, and if not, what degree of blending between nursing home residents and community residents might create a better comparison group for capitated rate setting.

Medicare payments to PACE have been primarily in the range of $1,000 to $1,500 per enrollee per month. Medicare uses its Adjusted Average Per Capita Cost (AAPCC) rates multiplied by 2.39 to reflect the frailty of PACE enrollees, but a single factor may be insufficient to control for variation in costs among PACE eligibles or to cover the acute care expenditures of

17

frail older persons in the community, many of whom have multiple physical and mental impairments.

More refined adjustment of the Medicare capitation by diagnoses would help capture variation in medical need and align PACE payments with the HCFA's risk adjustment for health plans, but diagnoses alone may not be adequate to predict the greater needs for medical services among Medicare beneficiaries with high degrees of frailty.11 (On these issues, see Silva and Gruenberg 1998; Gruenberg et al. 1999; Mukamel et al. 1998). Minnesota Senior Health Options12

Minnesota Senior Health Options (MSHO) integrates acute and LTC funding for dual eligibles by combining Medicare and Medicaid payments into a single capitation payment to managed care plans. The program, which is voluntary, began enrollment in January 1997 in the Minneapolis area and had 2,800 enrollees by early 1999.

The Minnesota program shows the difficulties of attracting older persons living in the community into a voluntary program of capitated acute and long-term care, especially if they have substantial needs. The payment system was designed to help maintain people with high levels of need in the community and even to encourage movement out of nursing homes. However, of the current enrollees, only 5 percent are nursing home eligible community residents, whereas about 80 percent of enrollees are nursing home residents. The very high proportion of nursing home residents among total MSHO enrollment resulted from the enrollment of a large number of nursing home residents who were previously enrolled in Evercare−a commercial managed care plan that has focused on nursing home residents and one of the larger plans contracting with MSHO.

The program uses four rate categories: (1) nursing home residents; (2) persons who leave the nursing home after a 6-month or more stay to live in the community (called nursing home conversions); (3) community residents with a nursing home level of need who enroll in the program while in the community, and (4) persons living in the community who are not nursing home certifiable.

MSHO encourages plans to care for persons in the community in a number of ways. First, for enrollees living in the community who move to nursing homes, plans are responsible for covering the first 180 days of nursing home care, but are paid at the community rate. For persons who remain in nursing homes longer than 180 days, responsibility for payment reverts to the state, so that plans do not face the large expense of paying for long-term nursing home placement. Second, if a plan can move an enrollee back to the community after at least a 6-month stay in a nursing home, it receives a large additional payment per month (called a conversion rate) for the next 12 months (with a lifetime limit for each individual of 1 year at the conversion rate). For transfers back to the community, plans receive a much higher Medicaid capitation, an additional $1,347 to $2,119 per month per enrollee (depending on age and county), which includes: (1) the regular rate for Medicaid acute and ancillary services for persons in nursing

18

homes, and (2) 95 percent of twice the average waiver payment for nursing home certifiable older persons.

So far, however, higher payment for nursing home conversions to community placements has not been particularly effective in moving nursing home residents back to the community, with less than 1 percent of members being paid for at that rate. Approximately four-fifths of MSHO enrollees are nursing home residents. Among the one-fifth of enrollees living in the community, one-quarter are nursing home-eligible, and three-quarters are not (5 percent and 16 percent of total enrollment, respectively).

For people who enroll in MSHO while already in a nursing home, the state continues to pay the nursing home per diem charge. A modest capitation covers Medicaid acute care and ancillary services — $292 to $548 per month per enrollee, depending on age, gender, and county.

Payment is relatively straightforward for the Medicare contribution to capitation. For nursing home residents, the institutional factors for the AAPCC are used. These range from 1.5 for Parts A and B for women who are aged 65 to 69 to 2.3 for Part A for men over age 85. The Medicare payment for nursing home conversions and nursing home eligibles living in the community is the PACE adjuster, which multiplies the AAPCC by 2.39.

A challenge for programs like MSHO is attracting enrollees. Dual eligibles in the service area covered by the program are already required to enroll in managed care for their acute care Medicaid benefits, so MSHO can draw enrollees from a sizable group familiar with managed care. But because of its voluntary nature, MSHO must attract enrollees into a system where any LTC needs they might have will also be met through their managed care plans. Thus MSHO must emphasize the services it offers—outreach, a single system, and care coordination—that beneficiaries do not find among the wide array of services that dual eligibles can receive from traditional Medicare and Medicaid (Kane et al. 1998, p.259). To date, MSHO has been reasonably successful in attracting beneficiaries who were already living in nursing homes and having services managed by Evercare but has attracted relatively few community-based residents. The Texas Star+Plus Program13

The Texas Star+Plus program, which was started in 1998, used mandatory enrollment of older and disabled Medicaid beneficiaries in the Houston area to quickly reach an enrollment of over 56,000 people in June 2000. For Medicaid acute and LTC services, beneficiaries must choose among three managed care plans, two of which also have capitated Medicare contracts.

Although the state has used enhanced prescription benefits to encourage Medicaid beneficiaries with Medicare coverage to get all their services through the same plan, not many Medicare beneficiaries are enrolled in HMOs for their Medicare services; fewer than 5 percent of the dual eligibles receive their Medicare and Medicaid services through a single plan. Thus Texas' efforts toward integrated care for dual eligibles have so far not met with great success. But for the approximately 22,000 Medicaid-only beneficiaries, who are primarily persons with

19

disabilities under age 65, Star+Plus has met with great success acute and LTC services are provided through a single plan.

Star+Plus illustrates how even a large mandatory program that aims to integrate acute and LTC must struggle to achieve integrated care for significant numbers of older persons. The rates for persons in nursing homes and for nursing home eligible persons in the community are different. However, because of the particular service history in Texas, these rates are not far apart, which creates a modest incentive for the program to serve persons in the community. This incentive could play a valuable role as the number of enrollees needing a nursing home level of care grows over time.

Texas sets two groups of rates, one for beneficiaries with Medicaid only, and another for dual eligibles (i.e., Medicare and Medicaid). Most of the older beneficiaries in Star+Plus are dual eligibles. Within each group there are three rates: (1) a rate for people receiving community-based services from the traditional waiver program, (2) a rate for people living in the community who are not eligible for nursing home services, and (3) a rate for residents of nursing homes.

Rates for nursing home care reflect a 2 percent discount from the state’s fee-for-service experience, while home and community-based services and acute care costs are discounted by 5 percent from fee-for-service experience. Rates in 2000 for LTC coverage for dual eligibles are $1,820 per month for nursing home residents, $1,524 per month for nursing home certifiable community residents, and only $96 for other community clients. Table 3 indicates the number of persons in the various rate categories, including combined acute and long-term care rates for Medicaid-only beneficiaries.

20

Table 3. Numbers of Medicaid-only and Dually Eligible Texas Star+Plus Enrollees and Rates in 2000

Medicaid-only (rates for acute and long-term

care)

Dual Eligibles (rates for long-term care only)

N monthly rate N monthly rate Nursing home residents

301 $3,328 1,484 $1,820

Nursing home eligible but living in community

519 $3,013 1,259 $1,524

Not nursing home eligible

21,348 $597 24,240 $96

Note: Monthly rates for Medicaid-only beneficiaries include over $1,000 in acute care costs for nursing home residents and nursing home eligible living in the community, and about $510 for those who are not nursing home eligible. Numbers of Star+Plus members in each category are as of June 2000.

The current program provides LTC services to a fairly small, but growing, number of individuals. The state exempted from mandatory enrollment persons who were already nursing home residents when the program began. As a result, in early 1999, there were only 600 nursing home residents in the program; this figure grew to 1,785 in June 2000, and is expected to grow in the future, since more than 5,000 Harris County Medicaid beneficiaries are currently in nursing homes. In addition, because the community-based waiver program had a tight slot limit, about 1,800 persons are enrolled in Star+Plus with the rate for nursing home eligible community residents. The state continues to limit their enrollment.

The majority of the remaining 46,000 Star+Plus enrollees are not heavy users of long-term care. Some of those with significant chronic illness or disability, of course, use substantial acute care services, as indicated by the $550 in average monthly acute care spending for Medicaid-only beneficiaries (see note to Table 5). But only about 12 percent of Star+Plus beneficiaries living in the community and not eligible for nursing home care had been receiving some formal LTC services before the program began.

The 2000 monthly nursing home rate of $1,820 for dual eligibles is slightly less than the established rate that the plans themselves must pay to nursing homes, so that each nursing home placement represents a slight loss for the plan. In addition, the plan does not get the higher capitation rate for members in a nursing home until after 120 days from the date of admission, which reinforces the incentive to avoid nursing home placement. But the nursing home rate is so low and the community rate so high that the differences between the rates for nursing home

21

residents and the rates for nursing home certifiable community-based residents are small, $315 for Medicaid-only and $296 for dual eligibles. The small difference between the rates makes Texas unusual; in most states, nursing home rates are two to three times higher than average waiver expenditures.

Risk-sharing arrangements between the state and the contractors will protect Texas from overpayments. Any underspending that is between 3 and 5 percent of the capitation will be split with the state, and any underspending that is greater than 4 percent of the capitation will be fully returned to the state. The state is not, however, liable for losses the plans may experience. State program administrators anticipate that contractors will assume a greater portion of the risk in future contract negotiation.

It seems quite possible that the Star+Plus rate system may encourage a modest reorientation of long-term care away from the nursing home and toward HCB services for those who are nursing home certifiable. The low capitation rate for nursing home residents offers a modest disincentive for plans to place enrollees in nursing homes. The high rates for nursing home certifiable community residents encourage plans to provide services in the community. The low rate, however, for those who are not nursing home certifiable would seem to allow only limited creativity with new services.

22

Tab

le 4

. Se

lect

ed P

rogr

ams w

ith C

apita

ted

Lon

g-T

erm

Car

e

Prog

ram

an

d

Star

t Yea

r

Targ

et P

opul

atio

n

and

Are

a Se

rvic

es

and

Prov

ider

En

rollm

ent

Num

ber

of E

nrol

lees

Ari

zona

Lo

ng T

erm

C

are

Syst

em

2000

nurs

ing

hom

e el

igib

le o

lder

, ph

ysic

ally

or

deve

lopm

enta

lly

disa

bled

, sta

tew

ide

acut

e an

d lo

ng-te

rm c

are

by

MC

O o

r cou

ntie

s, w

ith M

edic

are

serv

ices

FFS

, usu

ally

with

co

ordi

natio

n

man

dato

ry e

nrol

lmen

t for

Med

icai

d be

nefic

iarie

s; v

olun

tary

man

aged

Med

icar

e se

rvic

es e

ncou

rage

d by

dro

ppin

g of

cop

ays a

nd

dedu

ctib

les

28,9

93*

PAC

E**

On

Lok

1983

re

plic

atio

n 19

90

nurs

ing

hom

e el

igib

le o

lder

in a

do

zen+

citi

es

natio

nwid

e

acut

e an

d lo

ng-te

rm c

are

by n

on-

prof

it ce

nter

s, in

clud

ing

Med

icar

e se

rvic

es

volu

ntar

y en

rollm

ent,

attra

ctio

n of

day

hea

lth

cent

ers a

nd fo

cuse

d te

am e

spec

ially

for e

lder

s w

ith si

gnifi

cant

dis

abili

ty

6,88

4

Min

neso

ta

Seni

or

Hea

lth

Opt

ions

19

97

olde

r dua

l elig

ible

s in

five

cou

ntie

s ar

ound

Min

neap

olis

acut

e an

d lo

ng-te

rm c

are

by

MC

Os,

incl

udin

g M

edic

are

serv

ices

volu

ntar

y en

rollm

ent a

mon

g M

edic

aid

bene

ficia

ries i

n m

anda

tory

man

aged

car

e,

alm

ost 8

0 pe

rcen

t in

nurs

ing

hom

e; fu

ll ra

nge

of

serv

ices

and

coo

rdin

atio

n at

tract

ive

to p

eopl

e liv

ing

in c

omm

unity

2,80

0

Texa

s St

ar+P

lus

1998

olde

r and

dis

able

d in

H

arris

Cou

nty

(Hou

ston

are

a),

incl

udin

g du

al

elig

ible

s

long

-term

car

e th

roug

h 3

MC

Os,

acut

e ca

re in

clud

ed fo

r M

edic

aid-

only

; Med

icar

e se

rvic

es in

clud

ed o

ptio

nally

man

dato

ry e

nrol

lmen

t for

all

Med

icai

d be

nefic

iarie

s; v

olun

tary

man

aged

Med

icar

e se

rvic

es b

y on

e pl

an e

ncou

rage

d by

bet

ter d

rug

bene

fit b

ut fe

w ta

kers

56,1

79*

(incl

. 27,

000

dual

s)

* Fi

gure

incl

udes

bot

h ol

der a

nd d

isab

led

bene

ficia

ries.

**In

form

atio

n in

tabl

e in

clud

es b

oth

PAC

E an

d pr

e-PA

CE

site

s.

23

T

able

5. R

ate

setti

ng M

etho

ds fo

r Se

lect

ed P

rogr

ams w

ith C

apita

ted

Lon

g-T

erm

Car

e Pr

ogra

m

Med

icar

e C

apita

tion

M

edic

aid

Cap

itatio

n

Sam

ple

or R

ange

of M

onth

ly

Med

icai

d R

ates

N

otab

le F

eatu

res

Ari

zona

Lo

ng T

erm

C

are

Syst

em

AA

PCC

-bas

ed

Med

icar

e ra

tes f

or d

ual

elig

ible

s, w

ith st

anda

rd

adju

stm

ents

for a

ge,

sex,

cou

nty

• bl

end

of n

ursi

ng h

ome

and

com

mun

ity

expe

nditu

res b

ased

on

hist

oric

al m

ix o

f en

rolle

es, a

djus

ted

for a

ctua

l mix

•

bids

on

som

e co

mpo

nent

s of c

are

$1

,807

- $2

,276

*

Sing

le p

rovi

der p

er

coun

ty o

bvia

tes n

eed

for

risk

adju

stm

ent,

but

limits

role

for c

onsu

mer

ch

oice

. PA

CE

A

APC

C w

ith st

anda

rd

adju

stm

ents

and

with

2.

39 a

djus

ter f

or a

ll en

rolle

es

• in

som

e st

ates

, a b

lend

of n

ursi

ng h

ome

rate

an

d co

mm

unity

-bas

ed w

aive

r rat

e •

in o

ther

stat

es, t

he n

ursi

ng h

ome

rate

itse

lf •

smal

l sav

ings

from

dis

coun

t fac

tors

use

d in

m

any

stat

es

• fe

w st

ates

mak

e ad

ditio

nal a

djus

tmen

t for

de

gree

of f

railt

y

Den

ver

$1,5

87

Lack

of a

djus

tmen

t for

le

vel o

f fra

ilty

with

in N

H

elig

ible

wou

ld m

ake

larg

e ex

pans

ion

of p

rogr

am

cost

ly fo

r sta

tes.

Mor

e us

e of

frai

lty o

r dia

gnos

es

to a

djus

t pay

men

t see

ms

feas

ible

.

El P

aso

$2,0

29

R

oche

ster

$2

,928

*199

7 ra

tes f

or o

lder

and

phy

sica

lly d

isab

led

enro

llees

. Th

e ra

tes v

ary

by c

ount

y an

d co

ntra

ctor

. (ta

ble

cont

inue

s on

next

2 p

ages

)

24

Tab

le 5

. Rat

e se

tting

Met

hods

for

Sele

cted

Pro

gram

s with

Cap

itate

d L

ong-

Ter

m C

are

(con

tinue

d)

Prog

ram

M

edic

are

Cap

itatio

n

Med

icai

d C

apita

tion

Sa

mpl

e or

Ran

ge o

f M

onth

ly M

edic

aid

Rat

es

Not

able

Fea

ture

s

Min

neso

ta

Seni

or

Hea

lth

Opt

ions

AA

PCC

with

stan

dard

ad

just

men

ts a

nd w

ith

adju

ster

of 2

.39

for

enro

llees

who

are

el

igib

le fo

r or l

eave

a

nurs

ing

hom

e

• co

mm

unity

resi

dent

rate

from

acu

te c

are

cost

ex

perie

nce,

incr

ease

d to

cov

er ri

sk o

f nur

sing

ho

me

• ra

te fo

r com

mun

ity re

side

nts w

ho a

re n

ursi

ng

hom

e el

igib

le a

dds 9

5 pe

rcen

t of a

vera

ge o

lder

w

aive

r pay

men

t (do

uble

d fo

r tho

se w

ho le

ave

a nu

rsin

g ho

me)

•

nurs

ing

hom

e co

sts p

aid

fee-

for-s

ervi

ce a

fter

six

mon

ths f

or n

ew e

ntra

nts,

right

aw

ay fo

r ne

w e

nrol

lees

alre

ady

in n

ursi

ng h

ome

in c

omm

unity

, N

HC

$9

04-

$1,2

24

Plan

liab

ility

for f

irst s

ix

mon

ths o

f nur

sing

hom

e ca

re o

ffer

s stro

ng in

cent

ive

to m

aint

ain

peop

le in

co

mm

unity

. Fe

e-fo

r-se

rvic

e pa

ymen

t of o

ther

nu

rsin

g ho

me

cost

s with

bo

ost f

or th

ose

who

leav

e nu

rsin

g ho

me

prot

ects

pla

n w

hile

off

erin

g m

ild

ince

ntiv

e to

mov

e pe

ople

to

com

mun

ity.

in

com

mun

ity, n

ot

NH

C

$323

-$4

51

liv

ing

in n

ursi

ng

hom

e $2

92-

$548

ha

ving

left

nurs

ing

hom

e $1

,347

- $2

,119

25

Tab

le 5

. Rat

e se

tting

Met

hods

for

Sele

cted

Pro

gram

s with

Cap

itate

d L

ong-

Ter

m C

are

(con

tinue

d)

Prog

ram

M

edic

are

Cap

itatio

n

Med

icai

d C

apita

tion

Sa

mpl

e or

Ran

ge o

f M

onth

ly M

edic

aid

Rat

es

Not

able

Fea

ture

s

Texa

s St

ar+P

lus

AA

PCC

with

stan

dard

ad

just

men

ts

• se

para

te g

roup

of t

hree

rate

s for

Med

icai

d-on

ly a

nd fo

r dua

l elig

ible

s, bu

t no

dist

inct

ions

be

twee

n ol

der a

nd d

isab

led

• m

uch

high

er lo

ng-te

rm c

are

rate

s for

peo

ple

elig

ible

for o

r in

nurs

ing

hom

e th

an fo

r tho

se

who

are

not

elig

ible

for n

ursi

ng h

ome

in n

ursi

ng h

ome*

$1

,820

R

isk-

shar

ing

arra

ngem

ents

pr

otec

t sta

te fr

om

over

paym

ents

, with

pla

ns

keep

ing

only

smal

l mar

gin

as p

rofit

(firs

t 3 p

erce

nt,

half

of n

ext 2

per

cent

).

in c

omm

unity

, N

HC

* $1

,524

in

com

mun

ity,

not N

HC

* $9

6

* R

ates

show

n ar

e fo

r dua

l elig

ible

s. C

ombi

ned

acut

e an

d lo

ng-te

rm c

are

for M

edic

aid-

only

ben

efic

iarie

s are

: $3,

328,

$3,

013,

$59

7, o

f whi

ch

appr

oxim

atel

y $2

,100

, $1,

800

and

$40

cove

r lon

g-te

rm c

are

cost

s.

26

ENDNOTES 1 The anticipated demand increases are expected to cause a rise in the share of state budgets committed to long-term care for older persons from its current level of approximately 4 percent to about 8 percent over the next 20 years. About half of individuals age 85 and over need some assistance in everyday activities, compared with only about 10 percent among those aged 65 to 74. And the number of people over age 85, now at about 4 million, is expected to reach 6 million by 2010 and 9 million by 2030 (Kane et al. 1998, p.7-8). Medicaid spending on long-term care for older persons rose more than 10 percent per year from 1990 to 1995 (Wiener and Stevenson 1998a, p.5). In the absence of policy changes, expenditures are expected to more than double in real dollars over the 25-year period between 1993 and 2018 due to greater numbers of older persons and price increases greater than general inflation (Wiener and Stevenson 1998a, p.1). Some recent work, however, suggests that growth in nursing home utilization among older Americans is slowing (Bishop 1999). 2 Data over the 1980s from three National Long Term Care Surveys show that on average 6.1 percent of noninstitutionalized older persons have 3 to 6 ADL limitations, compared to 5.6 percent of older persons in institutions (Kane et al. 1998). 3 According to data from the National Long Term Care Survey, approximately 5 percent of older persons live in institutions, while over 6 percent live in the community and have limitations in three or more activities of daily living (Kane et al. 1998, p.42). Such impairment would likely make people eligible for nursing home care in most states. Another 6.5 percent have limitations in one or two ADLs, and some of this group would be nursing home eligible in some states, depending on their medical conditions, nursing needs, and ability to manage their own care. The number who would ultimately qualify for Medicaid LTC services would also depend on how many meet Medicaid’s financial criteria (income and asset limits). 4 The Health Care Financing Administration did allow Oregon, Minnesota, and Arizona some authority to deny Medicaid coverage of copayments and deductibles for Medicare-covered services to Medicaid beneficiaries who chose not to enroll in integrated programs, but HCFA appears unlikely to grant this authority to additional states. 5 Most case-mix approaches consider diagnosis, need for rehabilitation, cognitive status, age, gender, and other factors to calculate payments. Functional status, as measured by ADLs and instrumental activities of daily living (IADLs), such as medication management, using the phone, and meal preparation, is also an important factor in case-mix adjustment. In using functional status to adjust case mix, it is essential that the measures capture the limitations caused by cognitive and other mental impairments that are strongly associated with an elevated need for care. For example, functional limitations should not be measured in purely physical terms, such as the need for physical assistance with ADLs, but should also include the

27

need for prompting, cuing, and supervision to perform ADLs. Additionally, measures of functional status should include the need for supervision to protect an individual from the consequences of impaired judgment and problem behaviors such as wandering. Including functional status makes sense for case-mix adjustment because long-term care consists largely of supportive services that address an individual’s functional limitations. However, one drawback to rate adjustment by functional status or cognitive abilities is that a nursing home is rewarded with higher payments when a resident's functional status or cognitive ability falls (MedPAC 1998, p.86). This incentive reflects a fundamental tension in case-mix evaluation: the aim is to reward providers for serving individuals with above-average needs, but not for allowing people to get sicker or more disabled. 6 For example, imagine a program that had spent $60 million on home care services for frail elders over a year in which 6,000 people were eligible for the full year and another 500 people became eligible during the year and were eligible for an average of 6 months. Multiplying 6,000 people by 12 months and 500 people by 6 months would give 72,000 eligible months for the full-year eligibles plus 3,000 eligible months for the part-year eligibles, for a total 75,000 eligible months. Dividing the total expenditures of $60 million by the 75,000 months of eligibility would yield a monthly expenditure per eligible month of $800. 7 Information on the Arizona system was obtained from interviews with program administrators. See also Weissert et al. 1997. 8 About 45,000 people are enrolled in Texas's Star+Plus program, but only a small proportion receive significant long-term care services. 9 Information on the PACE program is drawn from Iversen, PACE Rate Comparisons, MedPAC 1998, and interviews with On Lok administrators. 10 Most states have separate eligibility criteria for an intermediate level of care (LOC) and a skilled LOC. Individuals meeting either criteria are considered nursing home eligible. The criteria for a skilled LOC generally include medical needs that require skilled nursing interventions on a daily basis. The criteria for an intermediate LOC are generally based on functional limitations and a need for non-skilled nursing care. There is considerable variability in the intermediate LOC criteria among states. Those who meet the intermediate LOC criteria in one state may not meet the LOC criteria in another state. 12 The problem of adequate risk adjustment of the Medicare capitation is also an important problem for the Social HMO or S/HMO programs. These capitated demonstration programs provide acute care, case management, and a limited LTC benefit of less than $10,000 per year for members who are nursing home eligible. Services are financed by Medicare through a monthly capitated payment and enrollee premiums. Members become eligible for LTC benefits based on a multidimensional assessment of functional status, not on medical criteria. The topic of

28

payment for the S/HMO plans overlaps somewhat with this paper's subject, but because the payments are set by Medicare and only 5 to 6 percent of the 60,000 S/HMO members are Medicaid beneficiaries, readers are referred elsewhere for a discussion of capitation in S/HMO programs (Gruenberg et al. 1999; MedPAC 1999, Ch. 5). 12 Information on the Minnesota Senior Health Options Program is drawn from Rudolph and Lubitz 1999, and from the authors’ interview with the program administrator in April 1999. 13 Information on the Texas Star+Plus Program is drawn from Rudolph and Lubitz 1999, and from the authors’ interviews with program administrators in April 1999.

29

REFERENCES Bishop C. Where are the missing elders? The decline in nursing home use, 1985 and 1995. Health Affairs 1999; 18(4):146-155. Branch LG. Integrating acute and chronic care. Generations.1999; Summer 23(2):5-8. Gruenberg L, Silva A, Corazzini KN, Malone JK. An examination of the impact of the proposed new Medicare capitation methods on programs for the frail elderly. Cambridge (MA): Long Term Care Data Institute. January 1999 [Unpublished paper]. Health Care Financing Administration. A Profile of Medicaid: Chartbook 2000. Kane RA, Kane RL, Ladd RL. The Heart of Long-Term Care. New York: Oxford University Press. 1998. Medicare Payment Advisory Commission. Report to the Congress: Medicare payment policy, Volume II: analytical papers. March 1998. Medicare Payment Advisory Commission. Report to the Congress: selected Medicare issues. Washington (DC): MedPAC. June 1999. Mukamel DB, Temkin-Greener H, Clark ML. Stability of disability among PACE enrollees: financial and programmatic implications. Health Care Financing Review 1998;19(3):83-100. National PACE Association. PACE Medicaid rates: methodologies and cost comparisons. OnLok, San Francisco: National PACE Association. 1999. Newcomer R, Harrington C, Preston S. Satisfaction in the social/health maintenance organization: a comparison of members, disenrollees, and those in fee-for-service. In Luft H (ed.) HMOs and the Elderly. Ann Arbor (MI), Health Administration Press, 1994, p. 111-139. Silva A, Gruenberg (DataChron Health Systems). Developing the financial component of waiver applications for programs for dual eligibles. College Park (MD): University of Maryland Center on Aging, Medicare-Medicaid Integration Project. April 1998. Rudolph NV, Lubitz J. Capitated payment approaches for Medicaid-financed long term care services. Health Care Financing Review. 1999. Weissert WG, Lesnick T, Musliner M, Foley KA. Cost savings from home- and community-based services: Arizona's capitated Medicaid long-term care program. Journal of Health Politics, Policy and Law 1997;22(6):1329-1358. Wiener JM, Stevenson DG. Long term care for the elderly: profiles of 13 states. Washington (DC): Urban Institute. August 1998a.

30

Wiener JM, Stevenson DG. State policy on long-term care for the elderly. Health Affairs 1998b;17(3):81-100.