Alternative to Medicaid Leaves Many Dissatisfied : Health: Tennessee plan has cut costs. But doctors and patients have voiced criticism; hospitals are losing money.

When then-Gov. Ned McWherter won federal approval in 1993 to overhaul Tennessee’s health care system, his state became the first in the nation to enact sweeping changes in the way medical services are provided to the poor. In short order, Tennessee replaced Medicaid with a managed-care program that sought to lower health care costs while extending services to hundreds of thousands of previously ineligible people.

The bold experiment, called TennCare, placed Tennessee at the forefront of health care reform. But now, almost two years later, with nearly half the states moving toward revamping Medicaid to some extent, questions are being raised about whether TennCare can survive.

The program has greatly slowed the rate of growth in health care costs. But it also has been plagued by problems, including widespread dissatisfaction among doctors and patients. In addition, the managed-care organizations formed under TennCare have suffered severe financial losses. And most of the hospitals that provide services report that they are in worse financial shape now than they were under Medicare, according to a September report from the federal General Accounting Office.

State officials acknowledge that there have been problems but insist that TennCare is steadily solving them. “It’s a work of art in progress,” said Rusty Siebert, chief of the Bureau of TennCare. “It’s not there yet.”

But critics say the state’s bad experience may be a precursor to what is in store for the rest of the nation if Congress carries through with its plans to shift the main responsibility for social programs to the states in the form of federal block grants.

“TennCare is a name for a phenomenon that is happening and could happen all over the country,” said Charlotte Collins, the senior vice president for policy and chief legal counsel of Tennessee’s largest public hospital, the Regional Medical Center in Memphis.

Morale Problems

At The Med, as the center is known, smaller government reimbursements have led to two rounds of layoffs and to services being cut. “Everyone was afraid the hospital might close,” Collins said. “We’re also going through morale problems related to turning patients away. We’ve never had to do that before. We are turning people who need care away. It really hurts.”

TennCare was created as a way of controlling the inflationary spiral of health care costs. In Tennessee, Medicaid accounted for almost a quarter of the state’s $12-billion budget and was growing at a rate of 20% a year. In addition, officials wanted to expand coverage to people who had been ineligible for Medicaid.

Under Medicaid, states directly reimburse hospitals and doctors for services they provide to qualified low-income people. Each state designs and administers its own program within guidelines set down by the federal government, which provides 67% of the funding.

Under the state’s five-year waiver from Medicaid rules, TennCare uses 12 private managed-care organizations to contract with hospitals, doctors and clinics to provide services at fixed rates. In less than a year, more than 1.2 million people were enrolled, including the 800,000 previous clients of Medicaid and 400,000 previously uncovered people.

Despite the program’s larger size, its cost increased less than 1% in its first year, much lower than the 10% national increase in Medicaid expenditures. But problems soon emerged, critics contend.

Confusion and delays in claims and premium processing marred the program’s first year. One managed-care organization allegedly bilked the state by enrolling nonexistent clients and fraudulently enrolling county prisoners.

Hospitals and doctors, faced with greater cost pressures exerted by the managed-care organizations, resisted the TennCare experiment. The Tennessee Medical Assn. lost a lawsuit to stop implementation of the program. One of the managed-care groups, Blue Cross/Blue Shield, required the 6,500 doctors who previously were involved in its network to also participate in TennCare, spurring one-third of them to drop out. Some hospitals, particularly in rural western Tennessee, also initially boycotted the program.

Nearly all the doctors and hospitals have returned, Siebert said. But according to a survey by the Tennessee Assn. of Legal Services, of 461 doctors who were accepting new patients, 31% said they were not accepting new TennCare patients. Advocacy groups also continue to complain about an inadequate number of primary-care physicians and specialists in some parts of the state.

More Oversight

State officials maintain that TennCare is well on its way to solving its problems. Gov. Don Sundquist, who took office in January, has stepped up oversight of the program, and the rates paid for medical services have been increased to improve the financial picture for hospitals and managed-care organizations.

Siebert said the critical GAO report that raised questions about whether the program can succeed “focused on the first six months of TennCare. Those bridges have already been crossed.”

In its report, the GAO acknowledged that recent changes in TennCare are potentially significant but added that it is too soon to determine how much effect they will have.

Many of the complaints about TennCare deal with the rate at which the state reimburses doctors and hospitals for medical care. Hospitals complain that TennCare payments do not cover the costs of treating patients, and doctors say their practices are suffering financially because of the program.

Five of the 12 managed-care organizations had financial losses the first year. Blue Cross/Blue Shield, the largest of the organizations with almost 50% of the enrollees, reported a $8.8-million loss and forecast a $35-million loss for its 1995 TennCare operations. The company told federal auditors that unless the state increases rates 10% retroactive to January, 1995, it will have to decide whether it will continue to participate.

Siebert, a venture capitalist before he took over management of TennCare six months ago, said he expects the actual losses to be much less than the projected figure. Furthermore, he said, first-year losses of $8.8 million on revenues of $610 million should be counted as a “tremendous success.”

“I don’t think anybody in their right mind would ever expect any other business to be that close to profitability in Year One,” he said.

Rated ‘Better’

A University of Tennessee survey last year indicated that 45% of the people enrolled in TennCare who had been on Medicaid complained that the care had worsened. Difficulty finding health care providers and the limited choice of doctors were among the complaints. But a recently released follow-up study by the university found that two-thirds of former Medicaid recipients now rate TennCare as “better” or the “same” as Medicaid. Siebert said that either means that the program has improved or clients are adapting to the system.

Some hospitals, however, have had a harder time adapting. None has been hit harder by TennCare than The Med, the state’s oldest hospital, which traditionally has served not only Memphis but also poor people from a wide area, including parts of rural Mississippi and Arkansas.

The hospital stopped getting funds directly from the state in January, 1994, when TennCare went into effect. The money went instead to the managed-care organizations, some of which took months to pay claims. In June, The Med and Baptist Memorial Health Care System stopped accepting patients from one organization, Access . . . MedPlus. The Med has since filed a lawsuit claiming the organization failed to pay $39 million in claims.

But problems didn’t stop there. The state made supplemental payments to hospitals, including The Med, that were deemed essential providers of medical care. But last January, the state notified the hospital that it was cutting $42 million it had been counting on.

After taking painful downsizing measures, the hospital is facing a deficit in its 1995-96 fiscal year of $18.9 million. A county committee created to study the future of the hospital said in a September report that more intensive steps must be taken to reduce the financial gap, which it estimated at $12.5 million next year and $8.3 million the next.

Siebert said the trauma The Med is experiencing is a necessary part of reform. Under Medicaid, poor people in the region sought care at the public hospital. Now, under TennCare, they have the option of going elsewhere.

Survival Seen

Collins said she also is convinced the hospital will not go under. “I see us surviving as a part of a larger integrated network.” But she added she is concerned about the trend toward shifting federal funds and responsibility for social programs to the states. She said big-city public hospitals throughout the country would be threatened by such a system.

The problem, she said, is that urban public hospitals, without federal oversight of social programs, will fall victim to the realities of state politics. “We have a Legislature which, like every other state, is dominated by the rural representatives. It’s very hard to make a case for funding urban public hospitals before a rural Legislature. . . . I think every public hospital in this country needs to think about that when we look at block-granting.”

Such hospitals are needed, she said, because “there are a lot of patients like the woman who walks in who is nine months’ pregnant and hasn’t had prenatal care. Nobody is competing for her business. She can’t go anywhere else. Like the people who are in serious automobile accidents . . . have been victims of crimes--shot, stabbed or whatever--and . . . have burns, and the little 1,000-gram babies. Those are the folks nobody is competing for. Those are people who are in the marketplace.”