The Health-Care Mirage

GOP boosters say Arizona's medical system for the poor should be a model for national health-care reform. But three federal investigations question whether Arizona's system is any less expensive than traditional Medicaid plans.

Anthony, who doesn't want his last name used for reasons that will soon become obvious, is not just a guy sitting at a bar in Flagstaff. Make some small talk, buy him a couple of beers, and the burly, mustachioed construction worker will tell you why.

Anthony is a mother. Or, at least, that's what the Arizona Health Care Cost Containment System thinks.

In 1993, AHCCCS, the state's indigent health-care program, paid for Anthony to give birth to a healthy, eight-pound, six-ounce girl. AHCCCS records show the cost of the claim was roughly $4,000--a little higher than normal, but then, this wasn't exactly a normal birth.

Actually, Anthony's sister had the baby. She had just moved to Tucson, he says, and hadn't been in Arizona long enough to become eligible for AHCCCS, the state's version of Medicaid. The baby wasn't about to wait, so one day Anthony sealed his AHCCCS identification card in an envelope and mailed it from his home in Flagstaff to his sister's home in Tucson. A couple of weeks later, the baby was delivered--at taxpayer expense.

"Cute kid, too," Anthony says, taking a long pull off a bottle of Coors Light. "Looks just like her mom."

Anthony doesn't express much remorse for what he did--although it's a felony that could land him in federal prison.

But you might think that a male giving birth would at least raise an eyebrow at AHCCCS--or start a light blinking on a computer somewhere. It didn't. The system that should keep this type of fraud from happening doesn't work a lot of the time.

So Anthony's claim was paid, along with millions of others that year. At only $4,000, the claim apparently wasn't large enough to raise questions at AHCCCS. And why should it?

Much larger financial irregularities have made scarcely a dent in AHCCCS' growing national reputation as a model for health-care reform.

When House Speaker Newt Gingrich talks about giving states federal money and the leeway to find their own solutions to social problems, AHCCCS is exactly the kind of program he is talking about.

AHCCCS (often pronounced "access") was the first statewide indigent health system to employ what is known as managed care; it places poor people into Health Maintenance Organizations, which provide them care at a set amount of money per month.

Supporters of the Republican Contract With America repeatedly hold up Arizona's system as a textbook example of how to run the federal health-care system for the underprivileged, Medicaid. National news media have jumped on the AHCCCS bandwagon, too; just two weeks ago, Time magazine trumpeted AHCCCS as a vision for the future of Medicaid.

It is not clear, however, that AHCCCS should be used as a model for anybody's health-care system. Indeed, Arizona's indigent medical system illustrates just how many problems the "devolution" of federal programs to the state and local levels may cause if the Contract With America is implemented fully.

In a series of investigative reports beginning last April, New Times has revealed a wide variety of management problems at AHCCCS--problems that raise questions about whether this particular managed-care system represents an improvement over traditional Medicaid programs. The problems include:

* Repeated mistakes in determining eligibility. These errors have led AHCCCS to pay for medical care for significant numbers of ineligible people--including many who had been dead for years.

* The approval of irregular, possibly fraudulent billings submitted by health plans--even though the irregularities were obvious on the face of the claims themselves.

* The absence of checks and balances that could prevent fraud--and the refusal to use the antifraud systems that have been installed.

All of these allegations are being studied in a myriad of state and federal investigations. Just lastmonth, the regional inspector general for the U.S.Department of Health and Human Services announced that her office is working with the U.S.Department of Justice on an investigation of AHCCCS fraud and waste.

The General Accounting Office, an investigative arm of Congress, has also begun to probe claims of waste at AHCCCS, as have the Health Care Financing Administration (the federal department that administers Medicaid monies) and the Arizona Attorney General's Office.

Most knowledgeable observers agree that the system for delivering indigent medical care in this country must be overhauled if runaway health-care costs are to be controlled.

AHCCCS officials claim their program saves substantial amounts of money over traditional Medicaid systems, even as it provides high-quality care and reduces fraud.

Those claims, however, are disputed by the intense scrutiny the program is drawing from law enforcement authorities--scrutiny that, sources say, could lead the federal government to demand the return of as much as $200 million in misspent health-care funds.

The Arizona Legislature approved the state's participation in Medicaid in 1974. Until then, state lawmakers had been willing to go without huge federal health-care subsidies to avoid what they considered oppressive guidelines on how the money should be spent. That left the tab for poor people's health care at the level of county government.

But as health-care costs spiraled upward and the state was flooded with new residents, counties found themselves unable to meet the budgetary demands of indigent health care.

Health-policy experts didn't want to create a traditional program that paid doctors and hospitals for services after the fact--known in health-care lingo as "fee for service"--for lots of reasons. For one thing, traditional Medicaid recipients ran up huge bills at emergency rooms, rather than using doctors' offices or clinics for basic health care. And there was little emphasis on preventive care, the best way to control costs. And fraud and abuse have long been widespread in traditional Medicaid programs.

After a bitter debate and eight years of delay, the Arizona Legislature implemented the first statewide, Medicaid-funded, managed-care system in the country. Under that system, the state pays health plans--HMOs set up specifically to deal with the Medicaid population--a set fee each month to provide poor people with medical service. Each patient chooses a primary-care physician who then is responsible for basic treatment and referrals.

This system of medical coverage--managed care--is common today. In 1982, it was considered radical.

Over time, the operating budget of AHCCCS--including $500 million the state contributes on top of federal funding--has grown to about $1.8 billion, making it far and away the largest single program in the state government.

Today, AHCCCS shells out roughly $1.2 billion a year to more than a dozen providers, providing health care to more than 450,000 people. Last year, when AHCCCS took health-plan bids, it was deluged with unprecedented numbers of offers from firms looking to get into the system. It was a far cry from just a few years ago, when the state went begging for bidders.

The Republican emphasis on managed care as a way of cutting Medicaid costs has elevated AHCCCS from a state experiment to a national poster child for the Contract With America.

In the past few months, AHCCCS has enjoyed much favorable coverage from the national media. A recent report on the program by the General Accounting Office gave it high marks for reducing the cost of care while maintaining high quality. Just two weeks ago, Time magazine quoted AHCCCS officials as saying they had the kinks worked out of their system--and the Arizona approach could be copied all over the country.

Both insiders at AHCCCS and long-term observers of the program, however, say it contains more problems than met the eyes of either the GAO or Time.

Perhaps the most serious problem at AHCCCS, critics say, is the program's complicated eligibility structure. Designed to satisfy an intricate patchwork of state and federal regulations that determine who gets benefits and who doesn't, the AHCCCS eligibility bureaucracy is itself a patchwork system.

It is the kind of tangled web that denies care to people who need it, yet pays for coverage for people who have no use for medical treatment because they are--well--dead.

A 1992 AHCCCS memorandum details a study of the eligibility of several dozen members randomly chosen from the AHCCCS rolls. An agency analyst found that, among certain eligibility groups, fewer than 20 percent of the recipients studied were eligible for benefits. Yet their health plans had been receiving payments for those ineligible citizens--to the tune of $400,000.

Some of the people were ineligible because they no longer lived in Arizona.
Others were dead. One payment-generating member had actually died in August of 1982, two months before the AHCCCS program was even created. A health plan had been receiving monthly payments for the dead woman's medical care for nearly ten years.

The memorandum about dead AHCCCS clients drew a puzzling response from the agency's bureaucracy.

A program executive said AHCCCS would not ask health providers to repay money they had received to treat people who were dead or otherwise ineligible for benefits.

The reason: Repayment would have an "adverse" effect on the participating health providers. Also, demanding the money might raise eyebrows in the federal government, which presumably looks unkindly on payments to heal the dead.

AHCCCS officials continue to insist that members are always taken out of the system when they die.

In April, however, AHCCCS employees searched some program files and provided the results to New Times. AHCCCS documents showed that the system was still making regular health-care payments for dead people.

Although relatively few files were searched, AHCCCS records showed people on the benefit rolls who had been dead for as long as a year.

Dead people are not the only ineligible recipients that studies of the AHCCCS rolls have turned up, time and again. The number of dead clients pales in comparison to those who are ineligible for other reasons--because they moved out of the state, for instance, or are no longer indigent. These people, too, are generating payments to health plans for care they no longer use.

Both the GAO and the Health Care Financing Administration (the federal body that actually administers Medicaid funds) recently released reports giving AHCCCS glowing reviews. Those reports have been the basis for much of the positive media coverage of the program.

But neither report mentioned dead people--or men giving birth. And, since issuing its report, the GAO has joined a welter of federal investigations into allegations of fraud at and through AHCCCS.

Lending an AHCCCS identification card to an ineligible person may represent a common type of Medicaid fraud, but it is hardly the only one--or the costliest.

Far and away the biggest slice of the $30billion lost each year to Medicaid fraud does not involve clients, but providers--that is, health plans, doctors, nurses and other health-care personnel who rip off the system.

One of AHCCCS' greatest strengths, its boosters say, is that its services are provided through "capitated" health plans, which are paid set monthly rates. If a plan knows how much money it will make off a patient, regardless of what care that patient requires, the incentive to bleed the system by giving unnecessary treatment is gone.

This claim is true--to a point. But not all of the money AHCCCS pays for medical care goes toward managed care. Large segments of the AHCCCS population, mostly American Indians and undocumented aliens, are not receiving HMO-style care. In fact, one AHCCCS official says that, taken as a whole, the fee-for-service segment of AHCCCS' population has more members than all but one of its managed-care health plans.

This large fee-for-service population leaves the state wide open to garden-variety Medicaid fraud. One AHCCCS study shows the program has paid up to five times the average Medicaid fee for the blood-cleaning treatment known as dialysis.

In July, AHCCCS adjusted the amounts of money it pays dialysis companies. Sources at the program, however, wonder how much money was wasted during the 12 years before AHCCCS changed the rates--and how much continues to be misspent on other types of care.

The claims-payment system seems to be at the heart of AHCCCS' fraud problem.
Internal AHCCCS records reflect an odd tendency: Patients are often admitted to hospitals complaining of certain illnesses or injuries, then are discharged after receiving treatment for entirely different maladies. Such discrepancies are seldom investigated, AHCCCS employees say.

For example, documents provided by AHCCCS employees show that, in one case, a man was admitted to the hospital for a middle-ear infection; when he was released, his records reflected that he had received treatment for a mechanical complication of a cardiac implant (that is, a pacemaker). Another man was admitted for pneumonia, but AHCCCS paid a claim for treatment of an abscess on his foot.

What actually afflicted these patients--or whether they were cured--remains a mystery.

The AHCCCS computer system includes safeguards that could stop payment on claims that contain suspicious or erroneous information. These safeguards--called "edits"--are supposed to send up red flags whenever claims are not in order. If the system worked as designed, it would alert AHCCCS workers about, for example, a claim seeking payment for the medical treatment of a dead person, or a male who gives birth. The edits are specifically designed to flag contradictions between someone's admission and discharge diagnoses.

Current and former AHCCCS employees say the reason the edits don't work is a simple one: The claims that come into the system are so full of errors that if the edits are on, the system quickly becomes backlogged with questionable claims.

So, these sources say, AHCCCS employees and contractors simply shut the system of safeguards off.

Claims fly through the system and are paid in a timely manner. Doctors and health plans are happy. And, as a bonus, when the federal government asks AHCCCS officials about error rates, they can say, honestly, that their computers tell them everything is just fine.

AHCCCS sources say this failure to use computer safeguards has intrigued the Department of Justice and the Office of the Inspector General. Both agencies have asked AHCCCS to reconstruct its member databases for the past several years--no small feat, considering the nearly half-million people enrolled in the program at any one time.

People who have been questioned by the federal investigators say AHCCCS is suspected of allowing fraud and waste on a mind-boggling scale. The figure $200 million has been mentioned.

So should AHCCCS be a model for 21st century Medicaid?
The best answer may be: No one knows.
Significant evidence suggests that AHCCCS is nowhere near as thrifty as its boosters--and Republican leaders--claim. With the only available numbers coming out of AHCCCS' own flawed computer system, there is little way to determine whether it actually underspends traditional Medicaid plans on a per-patient basis.

Until now, AHCCCS has prospered largely because Medicaid is a federal entitlement, and huge amounts of federal money have been flowing into the state on a regular, per-capita basis. The state's contribution has been significant, but it is unquestionably the federal money that has kept Arizona's indigent health system solvent.

The Republican leadership in Congress, however, wants to end Medicaid's entitlement status and give states block grants for indigent health care--with no strings, or federal oversight, attached. The current, minimal level of federal regulation of such programs would disappear. It seems likely that waste and fraud will continue at the same rate, or even grow.

And, given the current tenor of the budget debate, most experts predict that the rate at which federal health-care spending grows will be cut.

That funding slowdown will leave states with less federal help for meeting their health-care responsibilities. And those responsibilities will increase in Arizona for two reasons:

The state is currently riding an economic boom. When recession hits--and, unless history actually is at an end, it will hit sometime--more people will become unemployed, and more people will be poor enough to qualify for AHCCCS.

Two thirds of AHCCCS members are made eligible for health care through a single federal welfare program--Aid for Families With Dependent Children. When a recession swells the AFDC rolls from their current low levels, the number of people enrolled in AHCCCS will almost automatically increase.

A second looming statistic: The fastest-growing segment of the Arizona population is people over the age of 85. In fact, Arizona has the second-largest number of people that age, by population, in the country.

The Arizona Long Term Care System, the program for the physically or mentally disabled and the elderly, is the fastest-growing part of AHCCCS.

Experts inside and outside the program say health care for the elderly may one day represent the biggest cost in the AHCCCS system.

It all adds up to a triple whammy for Arizona's medically indigent.
Whenever recession hits, increased AFDC numbers will increase AHCCCS' costs. The program's long-term-care expenses will continue to grow. At the same time, federal spending on health care will be cut, or grow only slowly.

And, after years of tax cutting by Republican revolutionaries, the state may not have anywhere near the tax revenue necessary to deal with the rising demands on AHCCCS.

In the face of such a financial squeeze, Arizona may be all but forced to tighten eligibility rules and force large numbers of poor people out of AHCCCS.

So, to get their health care, the poor could begin showing up at emergency rooms in public hospitals again, generating enormous costs and leaving county governments to pick up the tab.

Sound familiar?

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