Medicaid Prepayment: Concept and Implementation

Abstract

This paper examines the potential role of prepayment in the publicly financed delivery of health care to the poor under the Medicaid program. After briefly reviewing the theoretical advantages of prepayment for each of the principal participants: provider, funder, and user, the major implementation issues faced over the long term in actually realizing those advantages are discussed. The implementation issues are drawn from the experience gained in negotiationsfor conversion of the Martin Luther King, Jr., Neighborhood Health Center (MLK) in New York City to prepaymentfor its Medicaid population, supplemented by the results of the two large-scale Medicaid prepayment programs now in operation in New York City and California. The principal issues include (I) enrollment growth and rate of turnover, (2) underutilization of services, (3) out-of-plan use of services, (4) regulations of the quality of care, and (5) failure of the prepayment economic incentive. Two basic approaches to dealing with these issues are presented: a strong contractual agreement between the public agency and provider, and regular evaluation of the program. The majorfeatures of the Medicaid prepayment contract recently negotiated with MLK which attempts to ease these problems are reviewed in detail. Prepayment of medical care has been strongly advocated as an effective approach to controlling the spiraling costs of health care. While prepayment can have beneficial impacts on quality of care as well, its dominant selling point has been the creation of a costcontrol mechanism which relies on the hidden hand of economic incentives within the health delivery system, instead of an externally imposed regulation. The use of prepaid financing for this purpose in the Medicaid program is no longer a new concept. As of the end of 1973, New York City had had seven years of experience with prepayment of a limited benefit package in a contract with the Health Insurance Plan of Greater New York (Health Insurance