A monthly publication that provides analysis of important health care issues under consideration by the legislature, executive branch, and professional associations.

Written by Peter Pratt, Ph.D., Vice President and Senior Consultant for Health Care Policy; Corina P. Andorfer, Consultant for Health Policy; Martin Ackley, Consultant for Health Policy; and Christa A. Rosenberg, M.H.S., Consultant for Health Policy.

Medicaid — January

January 1995


by Corena Peña Andorfer, Consultant for Health Policy

Michigan Medicaid likely is going to come under intense scrutiny as Michigan leaders develop their vision of health care reform. What they will discover is that Medicaid already is changing. To try to reduce growing spending, the program is being aggressively moved toward managed care. To give health care coverage to more people with low income, eligibility has been expanded, and other expansions are in the pipeline. The question is, however, is it possible both to expand the program and reduce its stranglehold on the state budget?

Managed Care

In 1972 a few health maintenance organizations (HMOs) in Wayne county were given permission to enroll Medicaid‐​eligible individuals. The trial was successful, and ten years later the state initiated a full‐​fledged HMO program in Wayne County. In 1991 the federal government granted permission to expand the program statewide.1

Generally, there are three managed‐​care options: HMOs, the clinic plan, and the physician sponsor plan (PSP). HMOs are fully capitated except for certain services such as dental and long‐​term care. The clinic plan is fully capitated except for certain services such as inpatient hospital services and dental and long‐​term care. The PSP is fee‐​for‐​service, but participating primary physicians are expected, for an additional $3 a month per patient, to perform case management services and act as gatekeepers.

Although recently there was discussion of moving all Medicaid recipients into a fully capitated plan, the idea reportedly has been tabled for the time being because (1) there is concern that HMOs may not be feasible in several Michigan counties, especially in rural areas and (2) the PSP may be an alternative to fully capitated plans. Evaluations show that the PSP leads to more patient visits to primary care physicians and more prescriptions but less patient use of emergency rooms and less inpatient hospital care. Observers believe that PSP cost savings will match full capitation.

To date there are roughly 635,000 Medicaid‐​eligible people enrolled in managed care. This is approximately 70 percent of the total Medicaid‐​eligible population that has been targeted for managed care (excluded are such individuals as those eligible through SSI or in long‐​term care facilities). On the provider side, approximately 3,500 physicians have signed up for the PSP, and 17 of the 18 HMOs in the state have enrolled (see accompanying table) or expressed an interest in a Medicaid managed‐​care program. Some Medicaid experts believe that managed care will save an estimated 10 percent per year. Others argue that the savings will be minimal if any.

There also is in the Michigan Medicaid program a move toward managed mental health care. If approved by the federal government (most watchers believe it will be), local community‐​based mental health agencies (community mental health boards) will be the gatekeeper for all mental health services, including inpatient and outpatient hospital care as well as community‐ and school‐​based services. February 6 is the final date for public comments on the move, and although March 1 is the proposed effective date, implementation likely will be pushed back.

Proposed Changes

In Michigan, expanding Medicaid eligibility seems to be a priority. The state already has requested a waiver for a “buy‐​in” program for people leaving transitional Medicaid (provided to them for one year, when they are leaving public assistance for employment). An estimated 3,000 people work their way off welfare each month, and the buy‐​in program will allow them to continue their Medicaid coverage, for 3 – 5 years, by paying a premium based on age, gender, and income. The premium is in lieu of the state portion usually required for the federal match. It appears that the waiver will be approved but probably with the condition that the state must pay a portion of the premium. Whether the state will agree isn’t known.

Rep. John Jamian (R‑Bloomfield Hills) has introduced legislation to expand eligibility to people living at up to 200 percent of the poverty level (approximately $12,000 for a family of three); certain individuals will be required to pay a portion of the premium, and again, federal approval is required.

Other changes awaiting waivers include expanding family planning services to women below 185 percent of the poverty level and permitting Medicaid to pay for certain nonmedical support (e.g., that provided by family members giving respite care and by agencies providing meals to the homebound).

Rising Costs

Medicaid has grown from 8 percent of the state’s discretionary budget in fiscal year 1979 – 80 to 20 percent in the current fiscal year. This figure has been kept in check to some degree by clever financing mechanisms, such as using the University of Michigan hospital to bring additional, disproportionate share payments from the federal government.

Although this particular loophole has been closed (which will cause a shortfall in the coming fiscal year), Medicaid budget experts say that there are other schemes in the offing to regain some of the lost federal funds. The bottom line, however, is that Medicaid spending has increased and is expected to continue.

There are several reasons Medicaid costs to the state have swelled. One is technology. For example, organ transplants, efforts to save premature babies, and measures to prolong life are on the rise and are expensive. Moreover, as lives are prolonged, long‐​term care is necessary, and that too is costly — one estimate is that Medicaid accounts for 60 – 70 percent of nursing home revenue.

Another reason for higher Medicaid costs is generosity. Some argue that Medicaid benefits are too liberal and the program does not contain proper incentives to induce users to contain costs. They point to the very low copays (from $0 to $3) and improper use of emergency room services. (The move toward managed care is in part to reduce emergency room visits by Medicaid patients.)

Yet another reason is the trend toward moving programs financed by other state programs to the Medicaid budget, to receive the federal match. For example, to recoup funds spent on care given Medicaid‐​eligible children (e.g., speech, language, and hearing therapy), the state now allows intermediate school districts to qualify as Medicaid providers. Other transfers include certain community mental health services and home‐ and community‐​based services offered by the Office of Services to the Aging.

Finally, health care coverage for the near‐​poor has increased costs. One example is the Healthy Kids Program, which gives full Medicaid benefits to all Michigan children aged 15 and younger who live in families with incomes up to 150 percent of the poverty level and alone is budgeted at $51 million for the current fiscal year.


Long before the rise and fall of health care reform at the federal level, Michigan Medicaid was changing. Plans have been developed, and some are in place, to reduce costs, increase federal dollars, and expand the number of eligible children. Ironically, as the state works to reduce Medicaid spending, it also is proposing and implementing programs that increase it.

Copyright © 1995

POs and PHOs — A Response to Managed Health Care — February (Part 1)

February 1995

POs and PHOs — A Response to Manage Care (Part 1)

by Corena Peña Andorfer, Consultant for Health Policy

Health care providers may drive the health care industry, but managed care is changing the rules of the road. In the face of skyrocketing medical bills, payers have turned to managed care to reduce costs. In the process, the way in which these payers approach the health care system has changed. They now scrutinize hospital and physician services, negotiate lower fees, and force hospitals and physicians to compete for a limited number of contracts. In response, some physicians and hospitals have organized physician organizations (POs) and physician hospital organizations (PHOs) to help them react to the change. This Bulletin provides an overview of POs and PHOs. Next month we will take a more in‐​depth look at the key issues facing them.

Physician Organizations

Generally, a PO is defined as a “business [emphasis added] entity formed by a group of physicians to pursue managed care contracting opportunities and other cooperative ventures with other physicians.” The main difference between a PO and a PHO is that the latter comprises hospitals as well as physicians; although the total number of such organizations is not known, anecdotal evidence suggests that both types of entities are gaining popularity in Michigan.

Robert Schwyn M.D., Ph.D., is president of a Dearborn‐​based PO — Southeast Michigan Physicians, P.C. — established more than a year ago. Although the organization is not yet completely operational, to date about four hundred physicians have signed up (two‐​thirds are specialists, and one‐​third are in primary care). Doctor Schwyn recognizes that over time there will be some attrition, but he believes that the number will not fall significantly. He maintains that POs are very attractive to many physicians: “We’re looking at a reorganization that will help us retain autonomy. We [physicians] can retain our independent practices for nonmanaged‐​care patients and have negotiating power for managed‐​care contracts.”

For assistance with developing information systems, credentialing, and administrative functions, Southeast Michigan Physicians has contracted with PhyCorp, a Tennessee‐​based company. The PO that Dr. Schwyn heads is particularly fortunate in that PhyCorp has provided a certain amount of funding because it is testing its involvement in such projects; the doctor tells us that PhyCorp has invested in only one other PO in the nation. By finding a financial backer, the PO has scored a significant coup: According to one source, PO start‐​up costs (i.e., to create the PO on paper) vary, based on the type of services the organization will offer, but frequently begin around $50,000. Thus, seed money can be a major factor in the formation of POs, and lack of it may check the rate at which the number of such organizations increase.

While Dr. Schwyn indicates that the direction of the PO that he heads still is under review, he does not rule out the possibility that at some point the entity will develop into a PHO and may even accept financial risk for patient care, making it, in essence, a health maintenance organization in practice if not in name.

Physician and Hospital Organizations

Allegiance Corporation of Ann Arbor is an example of a PHO that has proven successful for physicians and hospitals. The union of Huron the Valley Physicians Association (having an active‐​physician membership of 500) and a local hospital system (owning three hospitals), Allegiance Corporation has several contracts as a preferred provider and accepts fully capitated risk for approximately 88,000 people.

According to a study sponsored in part by the Michigan State Medical Society (MSMS), Allegiance generated total revenue of $139 million in 1993. From the capitated risk segment of its business, the PHO reported a $4.8 million surplus in 1993, up from a loss of approximately $3 million in 1992, the first year it offered capitated risk.

As with POs, initial capitalization is key. Although all PHOs in the MSMS study are 50 – 50 ventures (that is, the hospitals and the physicians have an equal funding obligation), the hospitals have provided the bulk of the up‐​front costs, while physicians have paid a relatively low initial fee ($1,000 – 2,000), with the condition that over time they will pay the remainder. According to the study, this type of arrangement “seemed to be an essential ingredient in getting these PHOs off the ground, since most of the physicians indicated that their colleagues would not have been willing or able to fund a full 50 percent share of the venture with cash at the outset — either because of the risk involved or because of a limited access to capital.”

While the number of PHOs in Michigan is not known, Brian Peters, Director of Health Care Futures at the Michigan Hospital and Health Association indicates that his organization plans to survey member hospitals and leaders in the physician community in this regard. He adds that currently, there is no clearinghouse for data on POs and PHOs, although “how‐​to” information is available.


The popularity of POs and PHOs is expected to climb, but there are some issues that can be expected to arise within the PO/​PHO structure and with policymakers.

For the most part, the problems experienced by POs and PHOs will relate to holding costs in line, to enable them to operate within a budget. Currently, the majority of physicians are specialists, yet the more care that can be delivered through primary care, the more likely a group’s costs will be kept down; there doubtless will be tension between the need for and practicality of primary care and specialists’ need to maintain their practices.

Another difficulty will be that physicians generally are not negotiators, and because they are not, they may need to rely on outside entities to make the deal and then manage the PO or the PHO so that it is profitable. The latter point raises the issue of governance of the POs and PHOs, which also may be problematic.

As POs and PHOs gain in popularity, size, and number, their regulation likely will be important to policymakers. Currently, POs and PHOs generally are seen as a professional services corporations or limited liability companies, and as such they are regulated as regular corporations. However, if a group assumes risk, it will be regulated as a health insurer. Also, as POs and PHOs increasingly involve larger numbers of physicians and hospitals, antitrust could become an issue.

As mentioned at the outset, in the March Bulletin we will discuss these issues in more depth.


Part of the goal of health care reform is to reduce the amount of money spent on health care — as expenditures decrease, however, providers lose income. Physician organizations and physician hospital organizations are an effort by physicians and hospitals to retain a certain amount of financial and clinical control over the practice of medicine. As Tom Wolff, Chief of POs and PHOs and Legal Affairs for MSMS notes, “Managed care leaves everyone jockeying for position to see who will control the health care system.”

Copyright © 1995

POs and PHOs — A Response to Managed Health Care — March (Part 2)

March 1995

POs and PHOs — A Response to Managed Care (Part 2)

by Corena Peña Andorfer, Consultant for Health Policy

Over the last few years, skyrocketing health care costs have triggered a decline in traditional fee‐​for‐​service reimbursement and an increase in health maintenance organizations (HMOs) and managed care plans. This trend means that hospitals’ and physicians’ fees — and services provided for the fees — are undergoing increasing scrutiny; it also means that primary care is favored by reimbursers (government and insurers) over more expensive specialty care.

In response, to maintain a certain amount of financial and clinical control over the practice of medicine, physician organizations (POs) and physician‐​hospital organizations (PHOs) have evolved. Through such organizations, physicians have improved negotiating power with managed care plans and, as groups, they even may have the wherewithal to accept the financial risk of providing managed care themselves — that is, agreeing to provide necessary care for a given amount of money; hospitals benefit by joining with physicians to offer a full continuum of patient care.

This Bulletin is the second of two on POs and PHOs and focuses on issues of governance, risk, and regulation.


In the past, physicians have been independent, working alone or in small group practices, with little interaction among specialties. Physician‐​hospital relationships traditionally were strained, as each vied for control of patient care. The changes in health care in the past few years, however, have made closer working relationships practical, and this development is reflected in PO and PHO organization and governance.

An example is the Jackson (Michigan) Physician Alliance. Andrew Krapohl, M.D., its president, notes that this PO was initiated by specialists, yet it is not structured around specialists but around primary care physicians. In fact, the organization’s bylaws limit specialist membership to 50 percent, and Dr. Krapohl points out that four of the seven board members are in primary care. He reports that the organization’s goal is to have the membership comprise at least 60 percent primary care physicians. This means that as the PO faces such issues as credentialing (establishing standards for organization membership), organization management and direction, and quality of care, the primary care practitioners will have the larger voice. According to Dr. Krapohl, specialists were willing to make this concession because they feel it to be in the best interest of the profession and the organization.

For PHOs, successful governance means working to diminish the differences of the past. Peter Schonfeld, group vice president for the Michigan Hospital and Health Association and former chairman of the board for Allegiance Corporation (an Ann Arbor PHO) and vice president for managed care for Catherine McCauley Hospitals, notes that “initially, there was a sense of mistrust between hospitals and physicians, each trying to protect their piece of the pie. But, over time, we have built trust and confidence in each other … physicians see hospitals acting responsibly and working toward the common vision, and hospitals see physicians doing the same.” Schonfeld believes that a key factor in Allegiance’s success is a code of ethics provision that guides members to discuss contentious issues prior to a board meeting, so that no one will be publicly embarrassed.

Allegiance Corporation also has community representation on its governing board. The board’s ten seats are allocated as follows: three for physician representatives, three for hospitals, and four for the community. Thomas Summerill, Allegiance president and CEO, states that “we felt that it is important for the community voice to be represented.”

Assuming Financial Risk

Although many POs and PHOs in Michigan still are getting off the ground, a few already are dealing with the question of whether or not to assume financial risk for patient care. The rewards can be significant, but so can the losses.

Mr. Schonfeld notes that Allegiance initially lost several million dollars after offering a capitated program through Care Choices, due in part “to the fact that health care professionals did not change the way in which they provided health care. They provided health care as if they were still on a fee‐​for‐​service basis, without adjusting utilization to a lower‐​cost setting.” Mr. Schonfeld observes that costs were particularly high for mental health services, chemical dependency treatment, outpatient radiology, and outpatient laboratory and pharmacy services. “These are areas in which the costs traditionally are ignored by physicians, but when you are held at risk for these costs you have to manage it.” Allegiance since has developed systems to provide physicians with information on their practice patterns; this apparently has paid off — the organization made more than $4 million in 1993 and $7 million in 1994.


As the popularity of POs and PHOs increases, antitrust, taxes, and regulation issues likely will garner attention. Currently, federal and state antitrust laws prohibit “contracts and other agreements that result in an unreasonable impact on competition” and “monopolization and attempts to monopolize.” Antitrust violations include agreement to fix prices or divide markets, and, in certain instances, group boycotts and “tying” arrangements (i.e., setting as the condition for a purchase/​sale the purchase/​sale of other goods or services). As a PO or PHO gains strength in any given community, it is possible that some critics will cry foul.

Another concern is hospital tax‐​exempt status. To maintain 501(c)(3) status, a hospital must maintain standing as a charitable organization and not inordinately benefit from investment in a PHO. Although a recent federal court case appears to give hospitals some leeway on this issue, it likely will be of concern for some time.

Finally, government regulation of POs and PHOs, particularly as they assume financial risk, is becoming the topic of some discussion. According to Fran Wallace, director of the Health Benefit Plans Division for the Michigan Insurance Bureau, POs and PHOs that meet the criteria outlined under section 333.21042 of the Michigan Code of Laws are regulated by the Insurance Bureau and the Michigan Department of Public Health and, as such, must be licensed and meet all of the standards applied to HMOs.

This means that although the statute does not specifically identify POs and PHOs, if an entity contracts directly with the public (not through an established HMO) in exchange for a fixed payment and is organized so that providers and the organization are, in a manner similar to a HMO, in some part at risk for the cost of services, the entity must be licensed. She adds that a PO or PHO that accepts risk via an HMO does not have to be licensed, but its activities must be monitored by the HMO with which it contracts, and this is a factor in the HMO’s licensing.


To survive in today’s changing health care market, physicians are expected to deliver care more efficiently, and, in addition, deal with hospitals, businesses, and insurers. Hospitals are expected to expand their focus beyond specialty care and be a part of meeting a patient’s total health care needs. POs and PHOs are an increasingly popular way for providers to meet these challenges.

Copyright © 1995

MDPH Director’s Conference: Healthy Communities — April

April 1995

MDPH Director’s Conference: Healthy Communities

by Corena Peña Andorfer, Consultant for Health Policy

The 1995 Michigan Department of Public Health (MDPH) Director’s Conference, “All Health Is Local: Partnerships, Assessment, and Action for Healthy Communities,” focused on the vital role in improving health that locales can play when they engage their residents and use their resources to bring about change.


Many conference speakers asserted that a key element in improving community health is forming a partnership among the people and organizations of the community. (“Community,” in this context, may comprise less or more than one geographic entity, and/​or it may target one or more specific populations.) Not only does working together promote success, but the current economic climate, which demands that increasing services be paid for with decreasing dollars, is forcing people and organizations to rely on one another to formulate and execute solutions to community problems.

For example, a locale may need a primary health care facility that will treat the uninsured for little or no cost to patients. To meet the need, partnerships may form in which residents, health care providers, public health agencies, employers, and/​or nonprofit organizations donate their ideas, time, and/​or resources to the initiative: Residents can volunteer time and ideas in forming and managing the facility; providers (professionals and organizations) can donate treatment, fund the facility, and/​or facilitate the process; and employers and nonprofit organizations also can facilitate the process and/​or donate the physical facility, assign personnel to help run it, and contribute money for operating expenses. The advantage of a partnership is that the entire community takes ownership of the project, and no one group or organization is forced to carry the entire burden of resolving a community‐​wide problem.

Partnerships form in any number of ways. Sometimes health providers initiate the process; sometimes a partnership evolves from a grassroots group’s effort; sometimes a state or local policy change stimulates partnership formation.

In Michigan, the MDPH actively is taking steps to encourage and assist community partnerships; the effort is made possible in part by the revenue from the 1994 tobacco tax increase. The department has drawn twelve “partnership regions” that reflect patterns of health care delivery (e.g., hospital service areas and public health jurisdictions). As the first step in meeting a locale’s health and delivery‐​of‐​care needs, its local entities are expected to work together to assess the health and the health needs of their residents.


Conference speakers suggested ways that assist in assessing community health/​delivery, including (1) analyzing area hospital admission patterns; (2) analyzing such vital statistics and data as poverty and high school graduation rates; (3) reviewing reports about the community; (4) mapping such useful information as demographics, health patterns, and community resources; (5) interviewing/​surveying residents and providers; and (6) identifying relevant community resources and assets. When all the information is combined, a community has a complete picture of its current health status and a powerful means by which it can engage its residents and resources in improving areas that the assessment has identified as weak.

Not every community needs to use every assessment technique; the relevance, cost effectiveness, and feasibility of each should be considered before embarking on an assessment.

The MDPH recommends a community take the following eight key steps in assessing and reassessing (roughly every two years) its health:

  1. Define the “community” (e.g., physical boundaries, target populations)
  2. Organize community participation in the health assessment
  3. Appraise community health needs and identify resources available in the community
  4. Determine priorities
  5. Set objectives to address the community’s most pressing health problems; they should be compatible with the MDPH’s “Healthy Michigan 2000” objectives (e.g., reduce infant mortality)
  6. Develop communitywide strategies to intervene (i.e., alter conditions found in need of change)
  7. Develop and implement a plan of action
  8. Continually monitor and evaluate the effort

Ideally, as the cycle repeats every two years, a community’s priorities will change, because of the success of the interventions it put in place in previous years.


Representatives of various locales around the country offered examples of success fostered by communities that have formed partnerships, assessed the population’s health, and taken steps to make a difference in the health of the residents.

  • Barbara Schoppman of the Fort Wayne Healthy Cities Committee told of the success of an immunization program funded by community hospitals and the Indiana Health Department and entirely run by 2,000 volunteers.
  • Patsy Matheny of Riverside Methodist Hospital in Columbus, Ohio, reported that the hospital is donating personnel and resources to a low‐​income community that initiates its own programs, such as a food pantry, a free lunch program (designed to stimulate interaction among residents), and health screening.
  • Darlene Collins of Primary Health Care Services of Northwestern Pennsylvania heads a health care network that provides fully integrated primary care services to 26,000 patients; over half of the network’s advisory board members are consumers.
  • Jeffrey Beard of the Riverside Health Center in Cambridge, Massachusetts, is an attorney who took a unique approach to enable the center to reach young African‐​American men: He asked grandmothers to help. The older women help the center identify problems and are invaluable in building trust between health providers and the young men. Through a “hoops and health” basketball league, which requires a health examination to participate, and blood pressure screenings given at a local club, the men are receiving services they otherwise would not.
  • Salim Al‐​Nurridin of the Chicago Health Advocacy Coalition described how his coalition coordinates a council of consumers that provides leadership and direction in building an integrated ambulatory health care system. He excited enthusiasm in the conference audience for his hands‐​on approach to dealing with fundamental social problems. His basic message: Ask people what they need to have done, and “just do it.”

Each speaker’s community has issues, populations, and problem‐​solving approaches different from those of the other communities, but among the speakers there was commonality about the lessons they have learned from their experience. Most notably,

  • advice, comment, and decision making should involve all people in the community, and don’t tell people what you can do for them, ask them what they need from you;
  • the community must buy in to the initiative, if the initiative is to succeed;
  • it takes time to build trust, and trust is vital to success;
  • communication must occur on a level that everyone can understand; and
  • the best approach is to build on community strengths, not dwell on its problems.

Many Michigan communities already have embarked on some form of a healthy community initiative, and the June issue of the Bulletin will feature them. If your community is doing something along these lines, we would like to hear from you. Please write, fax, or phone Christa Rosenberg by May 26 about your community initiative; the numbers are listed on the front of this Bulletin.

Copyright © 1995

Committees on Health Policy — What’s Next? — May

May 1995

Committees on Health Policy — What’s Next?

by Corena Peña Andorfer, Consultant for Health Policy

Although the state is abuzz with the possibility of the federal government financing Medicaid through block grants, any discussion of health policy in Michigan must include a look at what’s happening in the House and Senate committees on Health Policy. Both are chaired by Republicans, but the two committees are at very different places in their policy making.

Rep. John Jamian (R‑Bloomfield Hills), chair of the House Committee on Health Policy, has already identified several issues on which he plans to introduce legislation and that he will bring before the committee. Sen. Dale Shugars (R‑Kalamazoo), chair of the Senate Committee on Health Policy and Senior Citizens, indicates that his committee is still in the information‐​gathering stage and has not yet focused on specific issues. What follows is a discussion of what you can expect from the committees in the next few months based on interviews conducted with the committee chairs.

Rep. John Jamian

Last year Representative Jamian chaired a Republican task force on health care reform. In a series of hearings held throughout Michigan, the task force heard testimony on issues related to health care. Jamian indicates that his agenda is based, in large part, on certain issues that emerged on those hearings.

Managed Care and Patient Rights

One of the key issues for Jamian is managed care and patient rights. “When HMOs tell physicians to control costs and save money by putting a cap on utilization, I can accept it. But I have to wonder what the cost is to the patient’s health, especially when HMOs are receiving record profits. Instead of giving all of that money back to the physicians, why aren’t they putting that money back into the HMO for patient care?” He added that “there are implications in underutilization and overutilization.”

Jamian indicated that this problem is of particular concern to those with acute medical problems because of their need for specialized and costly medical care. Although health maintenance organizations have appeals processes to ensure patient access, Jamian is concerned that it is not sufficient. He notes that the problem stems, in part, from what he perceives as inadequate peer review. “Does the MD specialist in oncology have the right to challenge the decision of a utilization review nurse in an HMO? RNs are telling specialists what they can and can’t do.”

In addition to reassessing utilization review, Jamian indicated that he will likely include a bill that would require enrollees of managed care to sign off on their list of benefits. He wants complete disclosure to potential enrollees of managed care so they understand what they can expect from their health care coverage. He also indicated that he is not opposed to legislation that would make some information about providers available to the public so that they can make an educated decision about selecting a managed care plan.

Jamian stressed that, in general, he opposes any willing provider legislation. He argues, however, that there must be a mechanism for patients with acute illnesses to get the services they need.

In addition to working on legislation, Jamian has convened a pain management task force to look at this issue. He has also held one hearing in Oakland County and expects to have a schedule of additional hearings available soon.

Certificate of Need

Another issue that Jamian plans to have the committee address is legislation on Certificate of Need (CON). He has already held hearings and convened a work group on the issue and plans to introduce legislation before the House adjourns for summer recess. According to Jamian, “CON does not work. It protects certain interests whether they are effective or not and prohibits doctors from opening up competing outpatient surgical suites that could prove more cost effective.” He adds that “the big problem is that the largest purchasers of health care in the state want to make sure CON meets their standards so they can control the system, but we need less regulation.”

Jamian also wants to change the requirements for the distribution of funds from the Hospital Financing Authority. “I am concerned that it finances unnecessary hospital projects. For example, a hospital applies to CON for a cafeteria for physicians because doctors can’t eat in a regular cafeteria. The hospital finances it through the Hospital Financing Authority. This means that the citizens of Michigan are subsidizing it. These funds should be restricted for direct patient care services.”

Jamian is also concerned about the effect that the Hospital Financing Authority has on competition, which he believes is necessary if health care costs are to be contained. “When money is loaned to Michigan hospitals at cheaper than market rates this discourages outside health care providers from entering the state. It’s not a level playing field.”

Sen. Dale Shugars

Senator Shugars and the Senate Committee for Health Policy recently completed a series of hearings on health care. From Lansing to St. Ignace the committee heard testimony from a wide range of individuals. Health care providers and consumers offered their view. For Shugars this input is an important first step for his committee, “This is a textbook case in political science. We are letting the people tell us the issues that we need to confront.”

Task Force

Now that the last of the meetings is complete, Shugars indicated that the next step is to convene a task force of health care providers and consumers to attempt to identify solutions to the areas of concerns voiced by those who testified. Once the task force issues its report (probably sometime in the fall), the committee will look for those issues that it believes it will be able to translate into legislation.

Although Shugars did not want to identify any specific issues that he thought might surface, he indicated that any solution must encourage individual responsibility. He maintained that without such emphasis, any proposed change would not be effective.

Finally, Shugars stressed that Michigan has to wait for the federal government to decide on its stand on health care before the state can take on any issues in a substantive way.

Copyright © 1995

The ERISA: Will Proposed Changes Stymie Certain Health Care Reforms? — June

June 1995

The Erisa: Will Proposed Changes Stymie Certain Health Care Reforms?

by Christina A. Rosenberg, Consultant for Health Policy

Although balancing the federal budget and converting Medicaid to block grants have led in the news lately, Congress also is working on health care reform — at least three House committees expect yet this year to begin “markup” on incremental reform legislation.

In particular, the House Economic and Educational Opportunities Committee’s Subcommittee on Employer‐​Employee Relations will consider expanding the Employee Retirement Income Security Act (the ERISA), the federal act that preempts self‐​insured employers from state insurance and benefit regulations. This issue of the Bulletin outlines current ERISA provisions, the proposed changes, and what ERISA expansion, particularly to MEWAs, may mean.


Congress passed the ERISA in 1974 to protect employee pension and benefit plans from fraud and mismanagement, which were thought to occur in part because of varying regulation from state to state. Under the ERISA, the federal government regulates employee pension and benefit plans nationwide and exempts self‐​insuring employers from state insurance and benefit laws.

The ERISA preemption clause states that the act expressly supersedes and prohibits “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” governed by the ERISA. The original intent of the ERISA was to protect workers’ pension rights; including self‐​insured health benefit plans was “almost an afterthought.”

Multistate employers that self‐​insure their health plans (Michigan examples are the Big Three automakers) especially benefit from the ERISA’s preemption clause because they do not have to keep track of the various states’ insurance and benefit laws. They also do not have to offer any minimum set of health benefits, because the ERISA does not regulate the content of health benefit plans.

States, however, in formulating health care reform strategy, find the ERISA’s provisions restrictive because the states cannot include self‐​insured employers and those they cover. According to Patricia Butler, an ERISA expert, the act does not permit states to

  • directly regulate employee health‐​benefit plans;
  • mandate that employers provide health benefits or health insurance; and
  • impose premium taxes on self‐​insured plans or require them to participate in insurance pools for high‐​risk or other individuals (states can, however, tax stop‐​loss insurers, which provide coverage for self‐​insured employers when they experience catastrophic health claims).

Some estimates show that nationwide about 60 percent of jobholders work for employers with self‐​insured health benefit plans not subject to state insurance regulation. Thus, states are limited in their health care reform endeavors to (1) including in their plan only the remaining 40 percent of employees, those who are privately and publicly insured, and the uninsured; (2) obtaining an ERISA waiver; or (3) trying to change the ERISA.

ERISA Waivers and Reforms

ERISA waivers, which must be granted by Congress, have been nearly impossible to obtain; the act specifically stipulates that states should not expect to receive exemptions.

In the past several years, a handful of bills has been introduced that would have amended the ERISA and allowed states to experiment with health insurance reform, but none became law. A number of states are pursuing relief from the acts provisions in the courts.

In general, discussions about reforming the ERISA center around removing some of its “protective” provisions, i.e., allowing states to regulate employers with self‐​insured health plans. However, H.R. 995, the ERISA Targeted Health Insurance Reform Act of 1995, does the opposite: It would expand the ERISA’s preemption to other groups, specifically, multiple employer welfare arrangements (MEWAs), which consist of at least five private‐​sector employers, in the same industry or trade, that have created a large group to represent the employers and finance health and other benefits.

The sponsors of H.R. 995 propose the expansion as a way both to improve workers’ access to health coverage and lower insurance costs for small and large employers. The bill also

  • facilitates employers’ ability to form groups to purchase fully insured health insurance coverage (wherein the employer group takes no financial risk);
  • establishes funding requirements for self‐​insured health plans and stipulates notice and procedure requirements for plans that terminate;
  • permits insurers to design and offer employers and employees any type of coverage, regardless of state benefit mandates; and
  • reforms the insurance industry by requiring that (1) there be fair rating standards in the small‐​employer market, (2) health plan policies be issued to all small groups that apply, and (3) coverage be portable and renewable.

Such provisions have been proposed in the past, but the provision to expand the ERISA is a novel concept. What will such an expansion do?

ERISA Expansion to MEWAs

Expanding the ERISA’s preemption to MEWAs requesting status as an ERISA health benefit plan will transfer — from the states to the federal government — regulatory control of those MEWAs.

According to a November 1994 Michigan Department of Public Health publication, there are in Michigan ten self‐​funded MEWAs, which now are licensed by the state Insurance Bureau. Transferring their regulation to the federal government will give those MEWAs greater flexibility in providing benefits and administering their health plans. Federal jurisdiction also will mean that states will not be able to include such MEWAs in any type of state health reform, including measures to tax health benefits, require data collection, or mandate using uniform claim forms.

Moreover, the expansion may lead to other employers forming MEWAs and gaining ERISA preemption. Since Michigan requires an association or group of employers to exist for two years before becoming eligible to self‐​insure as a MEWA, there will be at least a two‐​year delay in a group’s becoming a MEWA and obtaining preemption. Over time, however, as more MEWAs gain ERISA preemption, support to maintain the preemption will strengthen. Already, large self‐​insured employers have a strong, vested interest in maintaining the ERISA, and so far it is they who are heading the effort to do so. Adding MEWAs to their ranks will make the hill considerably steeper for anyone who wants to change the system in the future.


Although H.R. 995, introduced by Rep. Harris Fawell (R‑Illinois), who chairs the employer‐​employee subcommittee, has top priority in the subcommittee, it is not yet clear what priority House leadership will give it. Some of the bill’s provisions are popular, but others, should be scrutinized carefully, lest the means by which health plans gained ERISA preemption in the 1970s — as an “afterthought” — is replicated, and coverage is expanded, with the effect that future change becomes doubly difficult.

Copyright © 1995

Will Michigan See a Combined Public Health/​Mental Health Department? — July

July 1995

Will Michigan See a Combined Public Health/​Mental Health Department?

by Martin Ackley, Consultant for Health Policy

When Gov. John Engler appointed Department of Mental Health Director Jim Haveman as interim director of the Department of Public Health, the quiet musings about joining the two departments turned into vocal speculation and debate.

In Engler’s May 10 press release on the resignation of Public Health Director Vernice Davis Anthony, Chief Medical Officer Ron Davis, M.D., was tabbed as the acting director. So why on June 26, did the governor name Haveman as the acting director — while he still heads up the Department of Mental Health? That has fueled a conclusion that a merger was on the horizon.

In the announcement, Haveman said: “I look forward to continuing the theme of collaboration that we are developing among Michigan’s health care and human services departments.”

Yet the governor’s special advisor for strategic initiatives, Dennis Schornack, says no decision has been made to merge the two departments. “We are considering the consolidation of functions in order to make a more clearly defined mission for health services,” Schornack explained.

Follow the Footprints

There has been a concerted effort over the past three years to bring the various state departments and agencies together to pursue a common goal — an efficient blending of services at the local level. Programs like Communities First, Michigan Interagency Family Preservation Initiative, and Strong Families/​Strong Children have laid the groundwork for interacting services provided by the departments of Social Services (DSS), Mental Health (DMH), and Public Health (DPH).

State psychiatric facilities have been closed, while funding and responsibility for those clients has been redirected to the Community Mental Health (CMH) systems. State funding to local public health departments nearly doubled last year to comply with a 50/​50 cost‐​sharing requirement in state law. More and more Medicaid services for poor families, the mentally ill, and substance abusers are delivered by local managed care systems.

The directors of the five state human services departments (DSS, DMH, DPH, Education, and Services to the Aging) are committed to implementing a task force report to reform the human services system in Michigan. One task force recommendation that the directors want implemented by October 1, 1995, is the formation of a single multipurpose collaborative body in each community in the state. This body is to include representatives from the DSS, CMH, local public health, intermediate school districts, and area agencies on aging.

“This reform is envisioned to focus on ‘new ways of doing business’ to achieve better results… across multiple human service and educational systems,” according to Systems Reform for Children and Their Families, issued by the multidepartmental Systems Reform Task Force.

This “new way of doing business” was also the core of the Secchia Commission report, which read: “Collaborative efforts at the state and local level are key to providing services to individuals in an efficient manner.” The governor may decide that merging of the Mental Health and Public Health departments is an efficient collaboration at the state level.

Mergin the Incompatible?

Many observers cannot see the logic of merging the Mental Health and Public Health departments. The DMH oversees the direct life‐​care and services for people with mental illness, while the DPH is geared more toward the prevention and control of broad population‐​based health concerns like air and water quality and immunizations.

Compatible or not, the departure of Vernice Davis Anthony provided the governor with an opportunity to reevaluate the mission and function of the health service departments. This is especially true in the context of possible federal changes with direct block grants to the states. Haveman has direction from the governor to see where there is overlap and duplication between the two departments, and to help coordinate efficiencies where they interact.

“There are 24 or 25 separate [Medicaid] programs that are administered by three departments,” Schornack said. “[With federal block grants] we could contemplate a health care financing authority at the state level to roll up some of these programs, for a program like managed care, where we’d be in the business of contract management as opposed to claims processing. It would make sense to put it under one department.”

Then there is substance abuse. Fifty‐​two percent of DMH clients have substance abuse problems and receive state‐​funded care. Three years ago, the statewide association of CMH boards supported Haveman’s efforts to shift substance abuse funding to his DMH budget. The governor has even proposed eliminating local substance abuse coordinating agencies, considering them an unnecessary layer of bureaucracy.

Around the country, there is a growing movement to integrate mental health and substance abuse services, said Michigan Association of Community Mental Health Boards Executive Director Dave LaLumia. “There’s a huge overlap of persons being served,” LaLumia said. “CMH has a 24‐​hour crisis network and the infrastructure to handle [substance abuse]. I’m not saying we have to take it over, but the services ought to be integrated. Maybe Jim’s placement over there will help in that integration.”

Another possible scenario is the transfer of these federal block grants directly to the local level. “A lot of funding comes in federal block grants to DPH,” said Michigan Association of Local Public Health (MALPH) Executive Director Mark Bertler. “We are looking into creating a system to get block grants from the state to deliver services at the local level.” LaLumia also wondered if any of the federal block grants would “trickle down to the local level.”

Tried and Trusted

Haveman has proven that he can make the tough decisions and weather the storms. Shortly after his appointment as interim director at the DPH, Haveman met with Bertler and secured an agenda slot at the group’s annual conference in August — for local health officials to meet and greet the new acting director.

“He expects to do more than ‘warm the chair’ of the [DPH] director,” Bertler said. “He intends to manage the department while he’s there. Putting Jim in now really helps the governor. He is someone the governor trusts and depends on.”

Having Haveman direct both departments on an interim basis gives the governor the luxury of having a combined department without battling opponents in the legislature and addressing the concerns of advocacy groups. And if the governor likes the outcome, a merger is only an executive order away.

Copyright © 1995

Michigan Statewide Health Data Base — August

August 1995

Michigan Statewide Health Data Base

by Martin Ackley, Consultant for Health Policy

Behind‐​the‐​scenes discussions to create a standard health data base in Michigan are beginning to sound a lot like health care reform. The purpose of the data base is to arm consumers with specific data to empower “smarter” health care decisions. Such a market‐​driven, competitive system is expected to generate greater efficiencies, lower health care costs, and better outcomes, similar to the goals of many 1992 – 3 health care reform proposals.

Mandatory statewide health data bases have been in existence in this country for over a dozen years, and Michigan is the largest state that does not have one. Summer meetings involving legislators and their staff and representatives of health providers, purchasers, and consumers have focused on the need for a data base and how it should look.

House Bills 4975 – 9, introduced June 15, 1995, and Senate Bills 633 – 7, which will be introduced when the Senate returns in September, would establish policies and procedures for a mandatory health data system. It would be a statewide clearinghouse for health‐​related data that would provide specific and compatible information on both providers and purchasers.

The bills describe in general terms the data to be collected:

  • Clinical and financial information on diagnoses, treatments, or procedures, by health plan, health setting, or health practitioner
  • Data related to the organization of health services
  • Data describing the health status of patients
  • Data characterizing the quality of health service outcomes
  • Statistical adjustment of all data elements according to the health status of the patient

The specifics of a data plan would be formulated and later administered by the Michigan Health Data Institute and its 13‐​member board of directors; the board would be appointed by the governor and comprise consumers and an equal number of providers and purchasers. The board of directors also would establish a fee schedule for providers and purchasers to fund the operation of the data base.

High Anxiety

A mandatory statewide health data base would be a far cry from what Michigan has now. The voluntary Michigan Inpatient Data Base collects and analyzes certain inpatient hospital data, but there are limits to what is available to the public. At the same time, many public and private entities (hospitals, HMOs, health systems, and others) are using data base services and computer software packages to build their own health data bases. Problems arise when separate data bases use different data elements and definitions. From a consumer’s standpoint, it’s like comparing bandages to bedpans. Understandably, providers and purchasers have been very guarded with their data. A mandatory, comprehensive, and accessible data base would expose their strengths and weaknesses. It would measure their competence and their charges, and providers and consumers are concerned that big purchasers will make health care decisions based on cost alone and eventually drive down quality. Another concern is that the data will be misinterpreted and unfairly assess the value of the health care provider.

Frank Webster, executive director of the Capital Area Health Alliance and a former hospital administrator and Blue Cross and Blue Shield of Michigan (BCBSM) executive, said the field has been tilted in favor of providers, and to have real health care reform, that has to change.

“We have the greatest health care system in the world, but it’s too expensive,” Webster said. “We can bring those costs down. Employers can’t just be payers anymore; they’ve got to become prudent buyers. But the group that benefits the most from a statewide data base system is the providers because the outcomes data will show them what procedures are the most successful.”

“There are high levels of anxiety about these bills,” said Larry Horwitz, executive vice president of the Economic Alliance of Michigan, a strong supporter of the legislation. “People plan to use this [data] to make purchasing decisions. That is the exact reason behind these bills — to allow consumers to do more focused purchasing.”

The Michigan State Medical Society (MSMS) and Michigan Health & Hospital Association (MHA) espouse qualified support for the legislation. The MSMS stipulates that any data collected must be adjusted for special patient conditions and not used in a punitive fashion. “Physicians are not confident at this time that those protections are there,” said Greg Aronin, manager of government relations for MSMS. “Health data is extremely complicated, and right now the bills don’t have value to providers.” Aronin says MSMS will not have an official position on the bills until it reviews them thoroughly.

The MHA recognizes that hospitals are the easiest sources to gather health care information. They just don’t want to be the only source. “It ought to be all providers,” said MHA group vice president for advocacy Laura Redoutey, “physicians, hospitals, clinics, and ambulatory centers. Information that is valid and credible ought to be available to the public, and there ought to be a mechanism to pay for that collection of data as well.”

On the Fast Track?

The bills are sponsored by Republican and Democratic members of the House and Senate Health Policy committees. The bills are being pushed by the Economic Alliance, a strong coalition of business and labor interests. Such other important stakeholders on this issue as MSMS, the MHA, and BCBSM, agree at least in principle with the concept of a health data base.

Senator David Honigman, a bill sponsor and member of the Senate Health Policy Committee, has been conducting public hearings and asked for suggested changes to the bills by the end of August. With the legislature returning to session on September 12, it appeared the bills were picking up steam.

However, key legislative staff for the chairmen of both Senate and House committees say there are no committee hearings scheduled or commitments made. “There is no agreement to take the bills up,” said Tim Goodrich, legislative aide to committee chairman Sen. Dale Shugars. “In fact, in relation to [committee] plans for the fall, it’s very faint on our radar screen because of the technical aspects of the bills and the various groups that would have to come to agreement.”

No one has asked House Health Policy Committee chairman Rep. John Jamian to take the bills up this fall either, according to his legislative aide Kathy Holcomb. “Representative Jamian supports the concept [of the health data bills], but feels they need changes,” Holcomb said. “We want to do more research on them. There could be some problems as they’re written — they’re too broad and they create another state agency.”

Senator Shugars has an advisory task group studying data and consumer information issues and is likely to wait until its recommendations come out before moving on the bills. “But if Sen. Honigman can work out an agreement, we’ll sit down and look at it,” Goodrich said.

Copyright © 1995

Attorney General’s Ruling Could Expand Health Care Access — September

September 1995

Attorney General’s Ruling Could Expand Health Care Access

by Martin Ackley, Consultant for Health Policy

A recent ruling by Michigan Attorney General Frank Kelley could signal an improvement in access to health care. Mr. Kelley’s ruling opened the Michigan State Hospital Finance Authority loan vaults for acquisition, expansion, and equipment projects of nonprofit outpatient health clinics.

“This is great news,” said Kim Sibilsky, executive director of the Michigan Primary Care Association, which oversees a network of 52 community and migrant health centers throughout Michigan. “We’re real pleased with this decision. It will provide a great advantage for us. To get access to funding like this — to help with the bricks and mortar — really helps.”

Until now, the hospital finance authority has sold bonds exclusively to help finance hospital projects. But the question of what can be considered a “hospital” under the Hospital Finance Authority Act was brought to the attorney general. His ruling (Opinion No. 6868) states:

Although the Legislature used the term “hospital” in the Hospital Finance Authority Act for the organization which is eligible for financing under that Act, the Legislature defined the term “hospital” broadly to include, among other things, any private nonprofit corporation located in Michigan that provides care for the sick or wounded or those who require medical treatment.

Mr. Kelley opines that the definition of hospital in the act is broader than the definition of hospital in the Public Health Code, and the act’s definition of “hospital facility” includes outpatient clinics. He ruled, therefore, that the finance authority is authorized to make a loan to two outpatient clinics that have applied, Detroit Community Health Connection and Cherry Street Services in Grand Rapids.

The law had been amended in 1994 (Public Act 428) to expand the definitions of hospital and hospital facility to what they are today, and the recent opinion updates a 1979 attorney general’s opinion that had said an entity must operate a licensed hospital to be eligible to borrow from the authority.

“This is good news certainly for the low‐ and moderate‐​income clinics and those that provide services to folks with no insurance,” said Roy Pentilla, executive director of the authority. “We will be able to do a financing pool for smaller projects that will be more viable because their cost of capital goes down.

“These clinics serve a real niche,” he commented. “We feel good about that; a good public service will be served from doing these projects.”

Filling the Underserved Need

There are nearly 300 primary care centers in Michigan, including the 52 community and migrant health centers, 121 rural health clinics, 21 clinics operated by local public health departments, and clinics targeted to serve Native Americans, the homeless, and people with AIDS. Yet, in all but six of Michigan’s 83 counties (Barry, Clinton, Livingston, Mason, Midland, and Otsego counties are the exceptions) there are areas that qualify as (1) being medically underserved, (2) having a shortage of health professionals, or (3) meeting the governor’s criteria for establishment of rural health clinics (a special designation afforded to all governors by the federal Omnibus Budget Reconciliation Act of 1989). Twenty‐​eight counties suffer from medical service shortages countywide.

“[Community health] centers are frequently the only care in those counties,” Sibilsky added. “[The attorney general’s opinion] won’t allow us to expand like crazy, but it will help. It will provide greater access to care to the uninsured. There’s not a lot of competition for that market. Who else will care for the uninsured? The hospitals and doctors will, to a point.”

Expanding access to these outpatient clinics also could help relieve pressure on hospital emergency rooms, where many uninsured and indigent people now go with ailments that are not life‐threatening.

The opinion “is good news for the not‐​for‐​profit clinics that focus on delivery of ambulatory care,” said Chuck Ellstein, group vice president for policy at the Michigan Health & Hospital Association. “It will expand access to the underserved populations in those areas and help hospital ERs, if we can get them [patients] to utilize those clinics.”

In addition to the applications by Cherry Street Services and Detroit Community Health Connection, work has started on securing loans to create or expand outpatient clinics in Battle Creek and rural Alcona County.

Where the Rubber Meets the Road

The authority’s Hospital Equipment Loan Program provides loans for acquisition, expansion, and equipment projects at low, variable‐​interest rates — currently 3.95 percent. But to qualify, outpatient clinics, like licensed hospitals, must be deemed credit worthy. “This is an instance where access to the finance authority will improve health care and raise funds for capital improvements,” Ellstein said, “but the question still is: What’s their payment stream to pay off the loan?”

Two recent developments have helped the financial standing of community health centers. One was permission from the federal government for nonprofit clinics to maintain a reserve fund. The second requires that Medicaid reimbursement to clinics be based on what it costs clinics to provide the services, and this has increased health centers’ Medicaid revenue by about 20 percent. A third strategy in the works is the application by 17 of the centers to form a health maintenance organization (HMO). HMO status will allow the clinics to continue serving their large Medicaid base while gaining all of the financial benefits of being a health care gatekeeper; any savings generated will be reinvested in the health centers.

Sibilsky says her association’s greatest concern now is the impending issue of wholesale Medicaid block grants to the states. The client base at urban clinics is 65 percent Medicaid‐​eligible, and at rural clinics 35 percent of the clients have Medicaid. On average, Medicaid funding accounts for one‐​third of all clinic revenues; federal, state, and private grants account for 36 percent; patient fees and private insurers pay for another 15 percent; Medicare is 5 percent; and other state and local funding covers 11 percent of health center revenues. Health centers use these funding sources to help underwrite care of the indigent and uninsured.

Cost‐​based reimbursement, which Sibilsky says is “the only new money we’ve had in eight years,” requires the state to match the federal dollars. She expressed fear that a no‐​strings‐​attached Medicaid block grant will eliminate the cost‐​based‐​reimbursement requirements and could put community health centers in jeopardy.

While the attorney general’s opinion offers hope for expanding the health care access of the low‐​income and uninsured, Congressional action this fall could limit the opinion’s effect.

“Health centers have been in Michigan for 20 years. There’s a real place for us,” Sibilsky said. “It’s a real necessity. The number of uninsured is going to grow, but the dollars to care for them continues to decrease.”

Copyright © 1995

PlusCare Rescued from the Minus Column — October

October 1995

PlusCare Rescued from the Minus Column

by Martin Ackley, Consultant for Health Policy

A 1990 Michigan gubernatorial candidate characterized Wayne County’s unique health care program for the indigent, now called PlusCare, as “a model for the country.” PlusCare provides managed health care for poor people who are not eligible for Medicaid. It was the first program of its kind in the nation.

When he was in the Michigan Senate, this same gubernatorial candidate — John Engler — helped create CountyCare, PlusCare’s predecessor, which enabled spending for indigent health care in Wayne County to be cut by more than $14 million while continuing to serve 54,000 people. As governor, however, Mr. Engler has twice attempted to eliminate state funding for the county program.

Both times the program has wrenched itself free from the budget‐​cutting axe. In 1992 a compromise produced a new PlusCare program in Wayne County, which lowered state funding for it from $42 million to $7.5 million and leveraged federal Medicaid matching dollars to help make up the difference. Most recently (three weeks ago), after the governor, by vetoing a $7‑million General Fund (GF) appropriation, underscored his unwillingness to have any state GF money contributed to the program, PlusCare rallied sufficient legislative support to garner $4 million.

To Wayne County officials, the summer veto of the already‐​pared‐​down GF appropriation for the program was an attack on PlusCare and the people it serves. To the Engler administration, it was a move to pursue a financial strategy that would net the state an increase of $16 million and still maintain the PlusCare program.

“The administration had no interest in ending PlusCare,” said Michigan Medicaid Director Vern Smith. “It’s an important program that’s doing a fine job.

“The executive recommendation removed the $7 million from the program so it could be financed entirely by county and federal funding and make available to the state the use of a [technical financing scheme] that would have resulted in $16 million of net GF profit to the state. The final agreement of $4 million just diminished the opportunity for the state to earn funds.”

Pitching with a Full Count

The PlusCare program has three sources of funding: federal, county, and state. Last year, the $51.5 million program had $29 million in federal revenue, $15.5 million from Wayne County, and $7 million from the state. Wayne County reported that 42,000 people were enrolled in the program, but state Medicaid officials saw evidence of only 33,000. At an annual cost of $1,000 per person, the $35 million (reflecting only federal and county funding) presented in the governor’s budget recommendations “looked like enough to run the program,” according to Smith.

Medicaid, however, was counting only people who had enrolled in the PlusCare program through the Michigan Department of Social Services (MDSS) offices. Not being counted were several thousand enrolled through the Wayne County Patient Care Management offices.

“At one time, [PlusCare] had around 58,000 enrolled,” said Patti Kukula, director of Wayne County Patient Care Management. “That dropped to around 43,000 in 1991, after the cut in GA [General Assistance]. Those people [who were cut] are still out there, but they don’t want to come in [to the MDSS office] and sign up for PlusCare. Before, they came in to get their GA check and while they were there they would sign up.”

Wayne County Patient Care Management is aggressively reaching out to find eligible persons not enrolled in PlusCare. Workers are posted in the emergency rooms of Harper‐​Grace, Detroit Receiving, and St. John hospitals every Friday and Saturday from 4:00 P.M. to midnight, signing up uninsured, non‐​Medicaid eligible patients. Some 40 applications are filed each weekend; usually, about 20 of the applicants actually qualify.

“We go to them,” Kukula said, in describing why their enrollment is growing, “We have a two‐​page form, compared to the 28‐​page Medicaid form, and we have a four‐​day turnaround [from application to eligibility decision], as opposed to 45 days for Medicaid. In some cases, we can get people qualified the same day.

“We’re trying to keep health care costs down. These are the people in emergency rooms who have nonemergency problems and are clogging up the system. By diverting people into primary care, we’re making a dent in the number of uncompensated ER visits in area trauma centers.” Wayne County officials estimate that PlusCare spares area hospitals approximately $20 million of uncompensated care. Without the program, emergency rooms would be flooded with more than 8,000 visits by indigent persons each month.

PlusCare contracts with three health maintenance organizations in Wayne County (Health Source, Master Care, and Total Health Care) to provide primary health care, emergency care, prescription drugs, chemotherapy and radiation treatments, dental extractions and dentures, and, every two years, eyeglasses. Forty hospitals and some 1,200 health professionals participate.

The PlusCare program was established in Wayne County in lieu of the state‐​run State Medical Program for indigent people that operates in the other 82 counties and provides only basic ambulatory care. Prior to PlusCare, the state’s share of funding for indigent health care in Wayne County was nearly $43 million a year.

Whereas the Medicaid program costs around $148 per month per recipient, the PlusCare program costs $83 per month. The average PlusCare recipient is an African‐​American male about 35 years old, who is a Detroit resident and a former GA recipient. The number of women enrolled has increased from 10 percent three years ago to around 20 percent today.

Nothing to Fear but Federal Block Grants

PlusCare has been saved for at least one more year, with the help of legislators who either (1) don’t want to see thousands of poor people denied medical care or (2) don’t want to see area emergency rooms teeming with unpaying customers.

And what of the future? “My biggest fear is [MDSS] gets block grants and they eliminate us,” Kukula said.

Although the shape of federal Medicaid block grants still is being forged and hammered out by Congress, their reality seems all but certain. The only question remaining is the form they will take.

straight Medicaid block grant will provide a flat amount for each state to spend on health care for the poor, and it will be unencumbered by the federal restrictions and regulations that accompany the current program. There will be few or no requirements on who gets covered, what services they will receive, or what each state must spend. In short, states will be able to create their own Medicaid program, free of federal intervention.

Also being discussed is a capped entitlement block grant much like the current Medicaid system, wherein the federal government matches state funding. Michigan currently covers 43 percent of Medicaid funding and the feds 57 percent, with no limit on the total spent. Under the capped entitlement proposal, the feds will cover no less than 60 percent of state spending, but there will be an upper limit on the amount of federal Medicaid dollars reimbursed to each state.

A capped entitlement program would exert a lot of pressure on a state’s Medicaid program planning. Although the feds would be reimbursing a larger percentage of the program costs, every dollar spent over the cap would have to come from the state GF.

Smith said it is uncertain whether block grants will threaten the PlusCare program, but he indicates that if there were straight block grants, with few mandates and restrictions, funding for PlusCare could be on the table.

“Clearly, what we need to do is look at what we’re spending [on Medicaid programs],” he added. “It all goes back to the value of PlusCare, and nobody in the administration is saying PlusCare is not a good program.”

Copyright © 1995

Medi‐​cuts May Take Bite Out of Providers and Private Sector — November

November 1995

Medi‐​Cuts May Take Bite Out of Providers and Private Sector

by Martin Ackley, Consultant for Health Policy

Despite concessions won by President Clinton to keep the Medicare system solvent and require Congress to adequately fund Medicaid, cuts to those programs still loom and health care providers and the private sector will catch the brunt of them.

The November 19 compromise agreement between the President and Congressional Republicans reopened the federal government, but it also reignited the budget debate and the continuing battle over health care costs. They now have until December 15 to come to agreement, using language in the continuing resolution so vague it’s a wonder how any of the principals involved could save face with it.

The U.S. House Joint Resolution 122 reads, in part:

“…the President and the Congress agree that the balanced budget must protect future generations, ensure Medicare solvency, reform welfare, and provide adequate funding for Medicaid, education, agriculture, national defense, veterans, and the environment…”

Whose definition of Medicare solvency do they use and what yardstick is used to measure the level of adequate funding for Medicaid? The two sides are tightening their chin straps.

Medicaid payments to providers reimburse an average of 80 – 90 percent of treatment costs and Medicare reimbursement is only slightly above that. With $450 billion in yet‐​to‐​be‐​specified reductions to those programs coming over the next seven years, the effect will be felt somewhere. Some fear reductions in health care provider reimbursements will be passed along to those employers and employees with traditional insurance plans, while others believe that cost‐​shifting is increasingly less of an option for providers.

1 – 2‑3 Shift

Businesses and employees will fall victim to the GOP cuts in Medicare and Medicaid, according to a study prepared for The National Leadership Coalition on Health Care, a nonpartisan coalition of business, labor, consumer, and provider organizations. The study predicts private health care payers will get a $91 billion kick in the gut as a result of cost‐​shifting by health care providers not able to absorb lower reimbursements and continue serving the indigent and uninsured.

Leadership Coalition on Health Care co‐​chair Robert D. Ray said “the study shows that a slowdown in government expenditures in the Medicare and Medicaid programs, if too rapid, could not only increase costs for private payers, it also could increase the number of the uninsured by half a million people, further increasing the cost‐​shift to the private sector and America’s families.”

The worst‐​case scenario looks like this:

  • Reductions in health care spending for Medicare and Medicaid create a shortfall of revenues for health care providers.
  • These shortfalls are minimized by the providers increasing costs to the privately insured (cost‐​shifting).
  • As private health insurance premiums are bumped up, fewer employers can afford the coverage they’ve been able to offer their workforce.
  • Private employers pass those increased costs on to the workers, cut the range of benefits they offer their employees, or cancel their health benefits altogether.
  • This results in a higher number of uninsured and underinsured.
  • The underinsured are more likely to go untreated and wait until a health problem becomes so severe that the most expensive care is the only option.
  • The uninsured, for the most part, seek medical refuge in hospital emergency rooms, which must serve the indigent. This uncompensated care must be absorbed by the providers.
  • Many times, hospitals try to shift the uncompensated health care costs onto the privately insured.
  • Repeat the cycle.

The worst‐​case scenario can get worse, according to Chuck Ellstein, group vice president for policy at the Michigan Health & Hospital Association (MHA). “To the extent that the government programs pay less than what it costs for the care received and if providers can’t shift the shortfall onto others, some providers will be forced out of business and end up denying access to those who do have [health care] coverage,” explained Ellstein.

Medicare and Medicaid changes will have profound implications in the private health insurance market, Ellstein added. “There will be unintended results that will have to be dealt with in the future,” he said. “It will hasten the need to address other health issues like comprehensive reforms or even incremental reforms. This isn’t the end.”

Some in the private sector, especially small businesses, see cost‐​shifting as an inequitable factor of health care but would rather see the monstrous Medicare and Medicaid system reformed than wail on about cost‐shifting.

“Any time you have uncompensated care, or undercom‐​pensated care, small business usually takes the burden of that cost‐​shifting,” said Barry Cargill, vice president of government relations for the Small Business Association of Michigan. “But preventing Medicare and Medicaid reforms — hindering these positive reforms — is not the way to address the problem [of cost‐​shifting to the private sector].”

Cargill said there are several things that can be done by hospitals to help reduce the rising cost of health care. He mentioned that hospitals can provide further internal cost‐​cutting measures and increase their efforts against fraudulent claims.

But Cargill admitted that health care cost‐​shifting is a continuing problem. He said as health care costs rise above the rate of inflation, it becomes less affordable for the small business person. “Many have to drop their coverage or look to co‐​pays for their employees,” he said.

The Shift Set Adrift

The MHA sees limited possibilities in this cost‐​shifting conundrum. With more private businesses enlisting managed care with capitated costs, cost‐​shifting becomes less available to hospitals and other health care providers.

Hospitals employed cost‐​shifting during the 1980s as a means of making up for losses from treating Medicare, Medicaid, and uninsured patients, according to a report issued by the Prospective Payment Assessment Commission (ProPAC) of Washington, D.C. Those hospitals that did the most cost‐​shifting in the 80s were in better financial standing in the 1990s, the report said.

ProPAC’s The Relationship of Hospital Costs and Payments by Source of Revenue, 1980 – 1991 report illustrates the trend of reduced cost‐​shifting in that private insurers are taking direct measures to prevent cost‐​shifting on their backs. In 1993 private payers paid hospitals 29 percent more than it cost to treat their patients, which was down two percentage points from the previous year. This trend has probably continued in the last two years.

“It appears that hospitals began losing the market power needed to continue cost‐​shifting in 1993,” wrote ProPAC executive director Donald A. Young, M.D. “Moreover, preliminary data suggest that the trend has now been reversed; that is, gains from private payers are declining, while reduced cost growth has led to smaller losses from treating Medicare and Medicaid patients.” Cuts to Medicare and Medicaid could alter the latter trend.

Hospitals themselves are not optimistic about the coming cuts and reforms. “The way it’s been done, I’m very pessimistic,” Ellstein said. “Many of the other [reform] elements to the health care system have been stripped [from the package].

“It didn’t make sense when they wanted to reform the [health care] system and leave Medicare and Medicaid alone,” Ellstein said, “and it doesn’t make sense now when they want to reform Medicare and Medicaid and not make changes to the entire system.”

Copyright © 1995

Outdated Vaccine Leads To Privatization — December

December 1995

Outdated Vaccine Leads to Privatization

by Martin Ackley, Consultant for Health Policy

The State of Michigan’s involvement in vaccine production is coming to an end. The centerpiece of the program, the DTP (diphtheria, tetanus and pertussis) vaccine for children, is rapidly becoming obsolete. Moreover, the ever‐​changing universe of vaccine production requires constant reinvestment in equipment and facilities.

In addition to the DTP vaccine, which is distributed free for Michigan children (as are certain other childhood vaccines that the state purchases), the division manufactures such other products as rabies vaccine, immune globulin product, and anthrax vaccine; the latter is available nowhere else.

It has been more than a decade since newspapers reported the first suggestion that Michigan might sell its state‐​run vaccine labs. The response, in 1984, was a loud cry of protest against privatizing the Biologic Products Division of the Michigan Department of Public Health (MDPH). It seemed unwise, by many people’s thinking, to get rid of the means to inexpensively produce and thus provide free to any child in Michigan one of the key childhood immunizations, the DTP shot.

Uncertainty hung over the head of the division until earlier this month, when Gov. John Engler issued an executive order (1995 – 25) creating the Michigan Biologic Products Institute — a temporary independent and autonomous agency in state government. Its purpose is to evaluate the value of the bio‐​products division and find a private entity to take over its operation within two years.

This move will bring an end to the state’s bio‐​products operation, an action that creates anxiety for those who work there. But at least it brings to resolution the long‐​standing issue of what will be done with the division. “There’s a lot of excitement and eagerness to get on with things here,” said Biologic Products Division Chief Dr. Robert Myers, D.V.M. “We’ve felt that for a number of years, all the way back to 1984 – 85, the state has been struggling with what to do with our division.

“I am pleased to be at the point where we know we’re doing something, and we know what we’re doing for the next two years, and we know that the two years will be spent in planning for the future,” Myers added. “I think that is a much better position to be in than the limbo we’ve been in for the past decade.”

Governor Engler has appointed Myers to be the director of the institute, which will be supervised and controlled by a three‐​member commission, also appointed by the governor. Within eight months of the commission’s first meeting, it is to have a detailed plan for transferring the biologic products operation into the private sector within the two‐​year term of the institute.

The executive order transfers to the institute (1) all federal licenses to manufacture and sell the vaccines, (2) contracts associated with the biologic products division (one is with the U.S. Department of Defense, for several million dollars), (3) all property and equipment needed to support the licenses and contracts, and (4) the $7‑million Michigan Pharmaceutical Products Fund. The institute will continue producing vaccines and fulfilling its contracts until the operation is privatized.

The Parade is Passing Michigan By

In announcing this executive order, Governor Engler explained that “recent changes in the market for pediatric vaccines and the growth of the division’s relationships with customers other than the State of Michigan have led me to conclude that the division no longer fulfills a state government function and can become a self‐​sustaining private enterprise.”

As mentioned, Michigan’s DTP vaccine is becoming obsolete, and there are no plans to modernize it. The whole‐​cell pertussis, which Michigan manufactures, is being replaced by acellular pertussis, along with a combination vaccine, or “cocktail” of DTP and other vaccines, and Michigan does not have a license to manufacture and distribute the new products.

Many health care providers in the state are buying the combination vaccines rather than using the free DTP provided by the bio‐​products division. The federal Centers for Disease Control (CDC) will cease buying the whole‐​cell pertussis next year, and the MDPH even is beginning to switch to the new product — the department distributed more than 150,000 doses of the privately manufactured combination vaccines last year.

The state’s distribution of its own DTP vaccine has been around 50,000 doses in past Novembers, but this November the state distributed only about 17,000 doses.

What Price Privatization

Despite being one of two states that manufactures its own DTP vaccine (Massachusetts is the other), Michigan’s immunization rate — a bleak 61 percent — for children two years old and under is rated last in the nation by the CDC. The governor surmises in his press release on the executive order that the strategy of having the state manufacture its own vaccine in order to achieve widespread infant immunization “has been a dismal failure.”

Myers questions if money the state has allocated to his division these past several years would have been better spent on improving the immunization rate. In regard to the low rate, he said: “I begin to wonder what benefit [the bio‐​products division] does have for Michigan with respect to pediatric immunizations.”

The benefits are clear to local public health departments, which administer and distribute most of the childhood vaccines to communities throughout the state: access and availability. Mark Bertler, executive director of the Michigan Association for Local Public Health (MALPH), points out that the move to privatization means (1) being unable to ensure that Michigan always will have the DTP vaccine [until now, Michigan has had the security of being unaffected when there have been nationwide shortages of certain vaccines], and (2) the state must purchase the vaccine on the open market.

The private market is more expensive, as made plain in a 1992 Biologic Products Division report showing a per‐​dose cost of 80 cents for state‐​manufactured DTP vaccine, $5.99 for the CDC‐​provided vaccine, and $10.65 for the commercial vaccine.

“The expectation is it will cost somebody more money for those vaccines,” Bertler said. “The state will have to decide if it’s in the best interest for it to use its resources to [continue to] offer those vaccines for free. Using the low immunization rate [as a reference], is the state willing to take the pledge that it will do whatever it takes [to improve the immunization rate]?”

For Whom Does the Next Bell Toll?

Statewide, health officials are watching to see which state function may be privatized next. To be attractive to the private sector, a function must involve a product or service from which profit can be derived — as is the case with bio‐​logic products.

Bertler believes “There are some core functions in which the state must continue to be involved, like the reference lab.” Yet the MDPH reference laboratory — which tests blood and tissue samples from around the state; identifies viruses, chemical poisoning, and diseases; and conducts testing and screening for tuberculosis, venereal disease, and genetic anomalies — is exactly the type of operation that may be most attractive to a private firm. The new $14.8‑million lab, jointly operated by the departments of Public Health and Natural Resources, offers a clean, state‐​of‐​the‐​art facility as well. The departments of Agriculture and State Police also have laboratories that may attract the interest of the private sector.

In the end, in making privatization decisions the state must balance (1) its ability to feasibly continue to carry out a function (which in the case of the childhood vaccines it cannot), (2) its responsibility for the common safety, and (3) the effect privatization will have on accountability and public confidence.

Copyright © 1995