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Public Statements

Hearing of the Senate Sepcial Committee on Aging

Location: Washington, DC


JULY 13, 2006
Good morning.

I would like to thank Senator Smith and the other members of the Special Committee on
Aging for inviting me to speak about Arizona's best practices in addressing some of the
challenges that states and the federal government face with Medicaid. Congress has spent the
last two years debating a variety of measures to stem the cost of Medicaid. Those efforts
resulted in several cost containment measures found in the Deficit Reduction Act of 2005
(DRA). Although the DRA provides some tools for cost containment, the states themselves have
developed best practices that will go farther than the DRA to reduce Medicaid spending while
avoiding a reduction of services, or higher copayments that yield only nominal savings.

Mr. Wagoner's testimony this morning, which focuses on the impact that escalating
health care costs have on the United States' business competitiveness, highlights the fact that
health care reform must look to both the public and private sectors for solutions. I am reminded
that the challenges we face with an increasingly aging population affect the employer retiree
system as greatly as they affect Medicaid and Medicare. Solutions for providing health care for
our aging population, however, must not involve cost shifting between the public or private
sector. Rather, we must design a comprehensive approach with long-term cost containment
strategies, but without sacrificing quality of care for the most medically vulnerable. Using the
Arizona model we can both save states money and increase the quality of care for our aging

While my focus today is on specific areas for Medicaid reform, I want to caution all of us
to avoid viewing the Medicaid program in isolation, but at the role Medicaid plays as part of the
continuum of the entire health care system. Medicaid has moved well beyond its original
mission in 1965 and the program must be both recognized as such and modernized to meet its
changing role. After a period of sustained growth in the Medicaid program, it is now the largest
insurer in the nation, covering the health care costs of half of all children, half of all nursing
homes, and increasingly the health care costs of low-income workers.

Although Medicaid's growth has slowed in the last year, the pressures on Medicaid
funding will continue to grow due to the following cost drivers:

Growth in the aging population. The first baby boomers are turning 60 this year, notably
former president Clinton and - just last week—President Bush. Estimates of the number of
seniors in 2050 sound nearly apocalyptic. Therefore, we need to institute the right programs
now that will create the capacity for future growth.

Growth in the 85+ year olds. Not only are baby boomers turning 60, but the fastest
growing segment of the aging population are those over 85 years of age. Advances in health
care have lead to longer life spans and greater health care costs.

Chronic disease epidemic. We are all aware of the epidemic of obesity in the country,
which contributes to greater incidence of chronic conditions such as diabetes and heart
disease. The growing prevalence of obesity and diabetes in our children have experts
predicting that children under the age of 18 will be the first generation not to live longer than
their parents.

The uninsured. Lack of health insurance does not prohibit the uninsured from receiving
health care services. They access services thought the largest primary care system in the
nation—the emergency room. Health care providers cannot remain profitable with the high
cost of uncompensated care, so they are forced to negotiate increased reimbursement from
other payors to offset these costs, including Medicaid. The financial pressures on our entire
health care system that the uninsured present must be addressed.

Personalized medicine. Innovations in health care research will provide medical treatments
that are tailored to an individual's genetic profile. While this ensures the best outcomes, it
also could mean higher medical costs.

Medical services inflation. Medicaid, like all payors, must contend with annual inflationary
increase for health care services—especially prescription drugs.

Because of these cost drivers, both states and the federal government recognize that Medicaid
is not sustainable in the long term in its current form. Therefore, thoughtful and rational
Medicaid reform is necessary to preserve the intended purpose of the program as a safety net,
and to preserve its increasing role within the entire health care system. The federal budget
deficit is one natural first impetus for addressing Medicaid reform; however, sound public
policy-making beyond the budget process must be the vehicle for real reform to ensure both
fiscal responsibility and the best solutions for the public good.

How can Arizona's Medicaid program offer some solutions? It can't solve the problem of
the uninsured, or the broader fiscal and moral issues of personalized medicine. These issues
must be the subject of a national debate that I hope this committee will precipitate. Arizona
however, can offer its best practices in Medicaid management to other states while the larger
issues of health care reform are debated.

Arizona's Medicaid program, the Arizona Health Care Cost Containment System
(AHCCCS), provides a robust, cost effective model for other states as they and the federal
government seek alternative models that can sustain the Medicaid program. Expanding the
Arizona model to new populations could cut Medicaid spending without eliminating services,
limiting enrollment, or increasing cost sharing for the poor. Its proven best practices in
purchasing prescription drugs, managing the health care of persons eligible for Medicare and
Medicaid, and expanding home and community based (HCB) placements for those at risk of
institutionalization deserve broad consideration.

Prudent Purchasing
AHCCCS is a national leader in cost effective purchasing of health care services. At its
inception in 1982, the federal government granted Arizona an 1115 waiver, which gave it the
authority to enroll every Medicaid eligible person into managed care organizations (MCOs). In
1989, that authority was extended to persons receiving long-term care services. AHCCCS'
waiver creates an integrated, flexible health care system that has matured into a high quality,
innovative, cost effective component of Arizona's entire health care infrastructure.

The hallmark of AHCCCS' success in containing costs while providing high quality health
care services is the use of managed competition with private sector MCOs when contracting for
services. Using market forces achieves the best quality for the best price. In addition to
competing for contracts with AHCCCS, MCOs also compete for membership and provider
networks. The need for a critical mass of enrollment and quality provider networks while
remaining profitable forms a three-way tension that drives the necessary balance for high quality
and cost effectiveness.

In addition to employing market forces to control costs, AHCCCS capitates the MCOs at full
risk for all services, including pharmaceuticals. Full risk contracting means that MCOs are paid
a fixed amount each month per enrollee to provide all medically necessary care. With fixed
reimbursement, MCOs are at full financial risk for those health care services. Therefore in order
to remain profitable, the plans are incentivized to manage a member's care to ensure that only
medically necessary services are provided. Additionally, they are incentivized to use their
purchasing power to negotiate favorable contracts for the most cost-effective services. Full risk
contracting is a critical component in incentivizing cost effective care because it aligns the
financial incentives of MCOs and the provider community with those of AHCCCS. What
Arizona has known about the benefits of capitated contracts for nearly 25 years, has been
formally recognized in a report issued by the Lewin Group in April of this year. Lewin estimates
that full use of capitated contracting in Medicaid would save the program $83 billion over 10

Full risk contracting also provides a flexible environment for effectively managing benefits.

AHCCCS MCOs have the flexibility to:

establish their own formularies based on evidence based medicine;
leverage their purchasing power to negotiate for provider rates below AHCCCS' fee for
service rates;
case manage recipients in order to avoid expensive hospital and institutional care, and
replace it with home and community based services; and
establish prior authorization and utilization management processes that reduce
unnecessary care and assure appropriate access to specialty care.

In 2003, the Lewin Group studied the Arizona model and prescription drug spending. The
study's key finding was that Arizona's per capita drug spending was the lowest in the nation
without compromising quality—38% below the national average. Generic drug utilization is an
important factor in controlling drug spending. Arizona has achieved a 72% generic fill rate for
its acute care population and a 71% fill rate for its long-term care population. This compares to
around 50% or less for other states. These data show that MCO contracting and drug
management are a best practice for controlling drug costs in Medicaid. This best practice is
directly attributable to the MCOs' capitated, full risk contracts.

Long-term Care

Arizona is particularly successful using the managed competition model for its long-term
care population. Arizona is the only state that has all of its long-term care recipients and dual
eligibles enrolled into managed care plans. This is the best model for integrating all necessary
care with a personalized case manager. The case manager is a degreed social worker or nurse
who coordinates the full compendium of health care and behavioral health services for the
member including planning and monitoring nursing home and home and community based care.
This model integrates all services into a seamless delivery system that maximizes independence,
dignity, and choice.

Under the 1115 waiver, Arizona is granted the flexibility to place persons in home or
community settings when those are the appropriate level of care. Arizona has eliminated the oftquoted

concern of increasing the covered population through a woodwork effect by
implementing a rigorous medical eligibility tool.

To illustrate Arizona's successful transition from traditional institutional placements for
long-term care to home and community settings, please refer to Attachment A. This movement
away from institutionalization was mainly achieved by developing financial incentives from the
state to the MCOs. In Arizona, AHCCCS pays the MCOs an average rate per person for all
nursing facility and HCB costs. The rate is based on a set targeted percentage for HCBS
placements, which are far less costly than nursing facilities. If the MCO achieves a higher
HCBS placement percentage than what is factored into the monthly capitation rate, they get to
keep a portion of the savings to the state. Conversely, if they don't meet their targeted
percentage, they have to absorb a portion of the losses attributed to a higher institutionalized
population. The federal government should identify similar appropriate incentives for states and
their delivery systems to facilitate similar results.

Attachment A illustrates the results of good public policy making, and Attachment B shows
the financial rewards. This graph shows the difference that AHCCCS pays MCOs for different
placement settings. Since 1999, the increase in home and community placements has saved
Arizona and the federal government an estimated $420 million through the end of fiscal year
2006. These are scorable savings that result from the sound policies of allowing people to age in
place, in the least restrictive setting.

Medicare and Medicaid integration

One of the most recent innovations approved by the Centers for Medicare and Medicaid
Services is the concept of the Medicare Advantage "special needs plans" (SNPs). SNPs are fully
integrated Medicare and Medicaid MCOs that serve the dual eligible population. Nearly all of
Arizona's Medicaid MCOs have either been approved to be a SNP or are partnering with a SNP
for Medicare services. This is an important development in breaking down huge federal
institutional silos to integrate care for our most vulnerable population. With the dual eligible
prescription drug benefit moving from Medicaid to Medicare, the SNP model is necessary to
maintain the full integration of care that was provided prior to passage of the Medicare
Modernization Act. Steps should be taken now to streamline this new authority and make it
permanent so that this model can be expanded in conjunction with managed care.

Health Information Technology

No discussion of health care reform is complete without at least a nod to the dire need for
modernizing how America delivers health care. An interoperable health information technology
(HIT) system is critical in eliminating waste and inefficiency, and improving health care
outcomes and patient safety.

Last year, I created the Arizona Health-e Connection initiative to develop a statewide
interoperable health information technology and health information exchange system within five
years. My steering committee developed a roadmap to achieve this goal, and Arizona is well on
its way. In many cases, Medicaid has a captive audience with health care providers and
therefore, should take the lead in implementation. Much of the benefit of an interoperable
system accrues to payors, so both states and the federal government should have a strong interest
in being the prime mover in developing interoperable systems through leveraging the right

I applaud the commitment of this special committee to continue exploring solutions to make
Medicaid more modern and fiscally sound. Because it is the largest insurer in the nation,
thoughtful reform that is driven by policy decisions and not merely quick budget solutions will
be necessary to ensure that the benefits of Medicaid continue for the health of our most
vulnerable citizens and to support the health care delivery system as a whole.

Arizona can help lead the way by offering its best practices in purchasing health care services
through managed competition and capitated contracts, increasing home and community
placements so our seniors can age in place, embracing new innovative programs such as special
needs plans, and engaging key stakeholders in developing interoperable health information

I am committed in my role as incoming Chair of the National Governors Association to
work with states and Congress to continue to develop meaningful reform that includes not just
the public sector, but also the engagement of the private sector for solutions that improve the
health of our health care system

Thank you.

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