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Appendix C. Evolution of Managed Care Within

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Medicaid and Disability Services

The original aim of the Medicaid program was to ensure that low-income, uninsured Americans gained access to primary and acute care services. Initially eligibility for program benefits was restricted to recipients of federally subsidized cash assistance, commonly referred to as welfare payments. Since many states used highly restrictive disability and financial eligibility criteria governing the receipt of adult cash benefits (i.e., Aid to the Blind (AB), Old Age Assistance (OAA), and Aid to the Permanently and Totally Disabled (APTD)), comparatively few people with disabilities qualified for Medicaid benefits during the early years of the program.

The enactment of the Social Security Amendments of 1972 (P. L. 92-603) marked a major turning point in Medicaid eligibility for low-income Americans with disabilities. The legislation repealed federally assisted, state-administered public assistance programs for low-income adults (OAA, AB, and APTD) and replaced them with the Supplemental Security Income (SSI) program, effective January 1, 1974. In addition to shifting responsibility for administering cash assistance benefits for low-income senior citizens and persons with disabilities to the Federal Government, P. L. 92-603 extended Medicaid eligibility to virtually all SSI recipients and established a national income eligibility floor that was substantially higher than the previous financial eligibility test for APTD, OAA, and AB benefits in most states. The legislation also, for the first time, extended cash benefits and Medicaid eligibility to children with severe disabilities living in low-income families and adopted a uniform statutory definition of disability applicable to both SSI and SSDI benefits. Passage of the 1972 legislation resulted in a sharp increase in the number of Medicaid enrollees with disabilities. Over the next three decades, Congress amended the Social Security Act repeatedly to extend Medicaid eligibility and coverage to additional segments of the population with disabilities. [i]

Section 1115 Waiver/Demonstration Authority

Even before the federal-state Medicaid program was created in 1965, Congress had established a mechanism for waiving statutory requirements under the Social Security Act. The Public Welfare Amendments of 1962 (P. L. 87-543) added Section 1115 to the Social Security Act. Under this authority, the secretary of Health, Education, and Welfare [ii] was authorized to grant states statutory waivers to demonstrate new, more effective ways of administering and delivering federally assisted services authorized under the Social Security Act. Decades later, states began using the Section 1115 authority to circumvent statutory barriers to enrolling Medicaid beneficiaries in managed health care plans.

Federal Managed Care Rules

Following the enactment of the Health Maintenance Organization Act of 1973 (see appendix B), enrollments in Medicaid managed health care plans increased substantially. But as more and more beneficiaries were enrolled in such plans during the 1970s, concerns mounted about questionable marketing practices, inadequate service delivery, poor quality of care, and the financial instability of some plans. These concerns led Congress to enact the Health Maintenance Organization Amendments of 1976 (P. L. 94-460). This legislation mandated that Medicaid beneficiaries could constitute no more than 50 percent of the enrollees in a managed health care plan. In addition, under P. L. 94-460, (a) entities seeking risk-based Medicaid contracts were required to meet federal HMO standards; (b) the definition of an HMO under the Social Security Act was aligned with the definition in the 1973 HMO act and the term “basic health services” was defined to include all Medicaid mandatory services; and (c) payments to organizations providing inpatient hospital services or any other managed Medicaid services were limited to federally qualified HMOs. [iii]

In 1981, as part of the Omnibus Budget Reconciliation Act (P. L. 97-35), Congress increased the maximum percentage of Medicaid/Medicare enrollees in a qualified HMO from 50 percent to 75 percent and amended Title XIX of the Social Security Act to offer states opportunities to experiment with alternative service delivery methods. One of these new authorities, established under Section 1915(b) of the Social Security Act, allows states to seek “freedom of choice” waivers, thus permitting them to lock selected groups of beneficiaries into Medicaid managed care plans. Under the same waiver authority, the secretary of HHS is empowered to grant waivers permitting states to limit the provision of services to selected geographic areas (a waiver of statewideness) and target services to a limited group of recipients (a waiver of comparability). States also are permitted under the Section 1915(b) waiver authority to use managed care savings to finance services not otherwise reimbursable under their Medicaid programs.

Beginning in the late 1990s, federal officials began to allow states to combine waivers under Section 1915(b) and Section 1915(c) to apply managed care principles to the delivery of LTSS. Secretarial waivers granted under Section 1915(b) allow a state to use managed care techniques in delivering LTSS, while Section 1915(c) waiver permits states to capture federal financial participation (FFP) in the cost of a wide range of HCBS. The Texas Star-Plus program and Michigan’s Specialty Services program for people with mental illness, developmental disabilities, and substance use problems are early examples of Section 1915 (b)/(c) combination waiver programs.

By 1990, about 2.3 million Medicaid beneficiaries were enrolled in managed care plans. [iv] Still, fewer than one in ten Medicaid recipients were participating in a managed care plan of any type. [v] In 1993, states began using the Section 1115 research and demonstration authority to combine eligibility expansions with mandatory managed care enrollment to reshape the delivery of health care services to low-income people and families. [vi] By employing Section 1115 waivers, states were able to create statewide managed care plans composed mainly (<75%) of Medicaid and Medicare beneficiaries. By 1997, CMS had approved 14 statewide managed care initiatives under Section 1115 demonstration/waivers, with total enrollment of around eight million people. All of these plans involved mandatory enrollment for at least a portion of participants. [vii]

Enhanced Managed Care Rules

The Balanced Budget Act of 1997 (P. L. 105-33) granted states authority to enroll most Medicaid recipients in mandatory managed care plans by amending their state plans, rather than by obtaining special secretarial waivers. [viii] To qualify for a state plan amendment, a state must agree to meet specific managed care program requirements, which include consumer due process protections, standards of access, and procedures for monitoring the quality and appropriateness of services. P. L. 105-33 also repealed the 75/25 rule governing the proportion of Medicare/Medicaid enrollees to private plan enrollees in qualified HMOs, thus permitting states to create Medicaid-only managed care plans.

As states expanded health insurance coverage to children and adults from lower middle-class families during the late 1990s and early 2000s, they sought to add more affordable plans with less robust coverage than was mandated under Medicaid law. In response to the states’ pleas, Congress included in the Deficit Reduction Act of 2005 (P. L. 109-171) authority for states to offer narrower coverage to selected groups of Medicaid recipients and impose cost-sharing requirements for such recipients. These so-called “benchmark” plans are similar to the major medical coverage offered under many commercial plans, with the aim of expanding coverage to comparatively healthy children and adults at an affordable cost.

Recent Development

Finally, the Patient Protection and Affordable Care Act of 2010 (P. L. 111-148) made a number of changes in federal statutes governing Medicaid managed care and expanded and improved HCBS options for Title XIX-eligible people with disabilities. In addition to authorizing several new and revised HCBS coverage options, Congress instructed HHS to mount a series of demonstrations to test innovative payment and service delivery models for people dually eligible for Medicare and Medicaid benefits (see discussion under Principle #1, Community Living, in chapter 3).


[i]. R. Gettings, Forging a Federal-State Partnership: A History of Federal Developmental Disabilities Policy (Washington, DC, and Alexandria, VA: American Association on Intellectual and Developmental Disabilities and the National Association of State Directors of Developmental Disabilities Services, 2011).

[ii]. The Department of Health, Education, and Welfare was renamed the Department of Health and Human Services in 1979 under legislation creating a separate Department of Education (P. L. 96-88).

[iii]. MACPAC, Report to Congress: The Evolution of Managed Care in Medicaid, June 2011.

[iv]. D. Freund and R. Hurley, “Medicaid Managed Care: Contribution to Issues of Health Reform,” Annual Review of Public Health 16 (1995): 473–95.

[v]. J. Holahan, S. Zuckerman, A. Evenans, and S. Rangarajan, “Medicaid Managed Care in Thirteen States,” Health Affairs17, no. 3 (1998): 43–63.

[vi]. D. Rowland and K. Hanson, “Medicaid: Moving to Managed Care,” Health Affairs 15, no. 3 (1996):150–2.

[vii]. D. Smith and J. Moore, Medicaid Politics and Policy: 1965–2007, (New Brunswick, NJ: Transaction Publishers, 2008).

[viii]. Secretarial waivers are still required in the case of Medicare beneficiaries (i.e., dual eligibles), American Indians, and children with special needs.