Center for Studying Health System Change

PUBLIC POLICY

In past years, Arkansas state and local policy makers have been relatively quiescent on matters concerning health policy. State policy, with respect to regulation of the private health care system, has often favored market forces over government action. For example, the state insurance market reforms enacted in 1991 permitted wide variation in health insurance prices and unlimited pre-existing condition exclusions, and state legislators rejected coverage expansions and other elements of former Gov. Jim Guy Tucker’s 1995 health reform agenda. Legislators also repealed the state’s certificate of need program (CON) for acute care facilities shortly after the sunset of a federal requirement mandating states to implement such programs.

State policy makers have pursued a relatively conservative approach with respect to the state’s Medicaid program. Until recently, state officials have not sought to expand the Medicaid program to "optional" populations such as school-age children and adults above certain levels of poverty. State Medicaid policy has also embraced primary care case management (PCCM) as a way to control costs and improve access to care rather than offering risk-based Medicaid managed care programs that other states have pursued. Under Arkansas’s PCCM program, primary care physicians are paid a set fee to manage referrals and coordinate care for each assigned Medicaid patient. Arkansas’s Medicaid program is also notable for having one of the highest match rates in the country: The federal government provides the state with $.73 out of every Medicaid dollar it spends, a reflection of Arkansas’s historically low per capita income levels relative to other states.

More recently, however, state health policy activity has increased. As indicated above, in 1995 Arkansas enacted one of the nation’s most sweeping any willing provider laws, which requires all health plans to accept physicians and other licensed health professionals into their network as long as the provider agrees to the plan’s fee schedule and other contract terms and conditions. The law was never enforced, however, and was struck down by the court. Proponents of the legislation have appealed the decision. Also in 1995 the legislature merged state employees and public school teachers into a single insurance pool, the only major provision of Governor Tucker’s more sweeping health reform initiative to survive.

In 1997 state legislators enacted an initiative called ARKids to provide subsidized insurance coverage to uninsured children across the state. Close to 20 percent of the state’s population has no health insurance, with children and young adults comprising a disproportionate share of that figure.¹⁰ Under the ARKids program, which is awaiting approval by the U.S. Health Care Financing Administration and slated for implementation in the fall of 1997, general revenues will be used to subsidize the purchase of insurance for children in families whose income is up to 200 percent of the federal poverty level. The program will be run through the state’s Medicaid program. Policy makers estimate that 90,000 children are eligible for the program statewide; ARKids aims to enroll more than half of these children during the program’s first two years.

PURCHASING

Competing forces have limited private purchasers’ influence over the shape of Little Rock’s health care system. Many employers are small, low-wage firms that either do not offer health benefits or are extremely sensitive to premium increases. On the one hand, this local economic feature, along with the recent consolidation of public purchasing power described above, tends to drive competition among health plans to hold down premiums. On the other hand, other factors, the importance of the health sector in the area’s economy, tend to temper demands for lower costs and, as a result, health system innovation that brings about cost reductions.

Private Purchasing
Demand for health insurance -- or the lack of demand -- among private employers is influenced in large measure by the nature of Little Rock’s economy. While unemployment is low and competition for workers high, a dynamic that typically increases purchasers’ demand for health insurance, many Little Rock-area firms are small companies with low profit margins, thereby reducing demand. Moreover, many new jobs being created appear to be non-unionized and low wage. Between 1990 and 1996, the manufacturing, finance, real estate and insurance sectors posted relatively anemic job growth gains in the 4 to 8 percent range compared with increases in excess of 30 percent among the construction and service jobs, sectors that are less likely to offer health benefits.¹¹

These economic forces have driven private employers to be extremely price sensitive regarding their health benefits. Several informants reported that employers have responded to premium increases by cutting back on benefits, moving to self-insured arrangements to reduce their health benefits costs or dropping coverage altogether, an action that many said has led to a decline in employer-based health insurance. As a result, many health plans have begun to redouble their efforts to control costs by, for example, reducing provider payments and controlling utilization. In addition, a number of major insurers, including BCBSA and Healthsource, are increasing their capacity to service self-insured arrangements, indicating that health plans are taking this trend very seriously.

While these dynamics tend to keep Little Rock’s health sector focused on bottom-line costs, other factors serve to defuse this pressure:

• A large number of Little Rock’s biggest employers are health care providers. After state and local governments, most of the remaining large employers in Little Rock are hospitals, which view health care spending as a principal source of revenue as well as an expense. These institutions, combined with the University of Arkansas for Medical Sciences and BCBSA, employ 11 percent of Pulaski County’s total work force.

• Given the prominence of health care in the area’s economy, many non-health-related firms, especially utilities and those in the service sector, view hospitals as valued customers and are loath to push too hard on costs.

• A number of large firms’ headquarters are out of state, leading to what one respondent described as an "absentee landlord" problem. These employers include the federal government (with 9,900 workers), the U.S. Air Force (6,890), Union Pacific Railroad (2,000) and Southwestern Bell (1,980).¹²

In addition, employers in Little Rock are reportedly extremely sensitive to restrictions on provider choice, diminishing the market appeal of HMOs featuring limited provider networks. Such concerns have also led to a proliferation of point-of-service (POS) plans, which allow employees to receive services from non-network providers. However, this growth may be due more to a requirement applicable to the public employee pool (described below) than to preferences expressed by private purchasers.

Public Purchasing
Perhaps the most potent purchasing force throughout the state is the Arkansas State Employee and Public School Personnel Insurance Board, created by state law enacted in 1995. The Board purchases health insurance for 70,000 state employees and public school teachers, with the largest number residing in the Little Rock area.¹³

The Board’s purchasing process appears to have stimulated the growth of managed care in the Little Rock area. Within the first year of the program, 22,000 of the 38,000 teachers participating in the pool migrated from indemnity products to point-of- service (POS) plans. This transformation has had the biggest impact outside of Little Rock where providers have been more resistant to managed care. According to respondents, many of these providers are now finding that they have to sign up with managed care plans in order to retain their patient volume, a large portion of which is public employees.

The Board also introduced a pharmaceutical benefits management program despite vocal protest by local pharmacists and key state legislators. Finally, public employees are making more cost-conscious choices among plans due to a change in the employer contribution formula, which increases employees’ share of the premium for more expensive plans. Respondents predicted that, over time, this contribution method will drive more employees into managed care plans.

The market impact of the pool has been limited by law, which requires the pool to offer all POS plans in the area, and by a decision made by the Board to eliminate the closed-panel HMO offerings after those bids came in uniformly above premium bids for the carriers’ POS products. This decision had the effect of moving thousands of state employees from closed-panel HMO arrangements to plans with looser network arrangements. The Board’s selection of a PPO vendor also had important implications for the market position of several key health plans in Little Rock, including QualChoice, the University of Arkansas for Medical Sciences-sponsored plan that lost the state contract, and BCBSA, which won it.

Compared with the Board’s program, Medicaid is a less active public purchaser and, as noted earlier, has not expressed interest in replacing its primary care case management (PCCM) program for the Aid to Families with Dependent Children (AFDC) population with a risk-based Medicaid managed care program. In fact, its advocates claim that the PCCM program has saved the state substantial sums. Moreover, the state legislature recently refused to grant the Medicaid Department authority to contract with a managed care firm for behavioral health services. Until recently, the state has taken a more assertive purchasing posture by directly contracting for inpatient obstetrical services with Columbia Doctors’ Hospital and University Hospital -- a purchasing arrangement that reportedly provides the state with significant discounts over list prices for these high-volume procedures. In April 1997, however, the state moved away from selective contracting for these services. The state now pays 85 percent of per diem rates to any Medicaid-qualified hospital that agrees to provide care at such a discount.