Setting capitations for Medicaid: a case study

Health Care Financing Review, Summer, 1990 by Arleen Leibowitz, Joan L. Buchanan

The greater stability of estimates based on more observations means that subgroup definitions based on the entire State would have yielded more precise estimates. These estimates would be less likely to vary widely from year to year.

Rather than base the subgroup rates on data for the marketing area, NYS could have computed the average expenditure of each rate group relative to a standard group that was amply represented within the marketing area. In this methodology, State data would be used to calculate the ratio of the medical use of (for example) females 15-20 years of age relative to female ADC recipients 1-14 years age. This ratio would then be multiplied by the mean use of female ADC recipients 1-14 years of age (who are numerous) within the marketing area to estimate the use of females 15-20 years of age. This combination of State and local data allows the large numbers of observations in the State data to determine the ratios, and the local data to determine the local price and use structure.

This methodology assumes that relative use by age is constant over the State. This is at least as tenable as assuming (as does the NYS methodology) that the trend in medical costs is the same throughout the State. Any misspecification of the local rate groups is likely to be compensated for by the greater reliability (i.e., lower level of statistical uncertainty) of the estimates based on larger sample sizes. In addition to providing a more reliable estimate, this methodology facilitates rate calculations for other HMOs within NYS, since the established rate group relatives would only need to be applied to the local standard group.

The increased sample size available would also have allowed groupings with more intuitive appeal. For example, although there are relatively few males 20 years of age or over on Medicaid in the HCP marketing area, their greater representation in the State data may have allowed separate capitation levels for males and females over 20 years of age. With this separation, the cap could have reflected the relatively heavy use of medical care resulting from reproductive-related services for women over 20 years of age. Males in this age group have significantly lower use, as can be seen from a comparison of each group's average medical costs relative to children 6-13 years of age (Table 2).

Claims for Medicaid recipients of all ages are used in the cap calculation. In practice, however, newborns are never enrolled in HCP at birth because a formal enrollment application must be made for them under the NYS regulations. (In some States, newborns are automatically enrolled in their mother's HMO, and other States include newborns' costs on the mother's record.)

It is also unlikely that a child in neonatal intensive care would be enrolled by the plan. Therefore, in New York, the costs of some of the highest medical care users are included in the capitation, although the plan is not at risk for these costs. We illustrate this point using a sample of FFS Medicaid claims for ADC recipients in the HCP marketing area. Table 3 contrasts the average monthly Medicaid costs for all children under 1 year of age and the costs for the same group excluding newborns under 2 months of age. Plans that do not enroll newborns for the first 2 months of life could expect claims that average $165 per month. However, if the costs of infants in their first 2 months are included in the rate calculation, the plan will get paid an average of $223 per month, a windfall of $58 per month.