Senate Bill 340, introduced by Senator Greg Reed on March 14, would dramatically alter the structure of the Medicaid program, and delivery of services thereunder, in Alabama. An identical bill, House Bill 454, was introduced in the House of Representatives on Wednesday, March 20 by House Health Committee Chair, Jim McClendon. The legislation is based in large part on the reforms implemented in Oregon approximately one year ago. This memo analyzes the Senate bill as introduced. As noted in the Joint Health Committee hearing on the bill, held Tuesday, March 19 in the House Chamber, it is likely that the legislation will be amended as it makes its way through the legislative process.

The plan relies on the division of the state into not more than eight (8) Medicaid regions to be served by provider-dominated regional care organizations (“RCOs”), and a movement away from a traditional fee-for-service model to a capitated payment model. Within these regions, the Alabama Medicaid Agency (“Medicaid”) must certify at least one RCO, but each region must be capable, as determined by Medicaid’s actuary, of supporting at least two RCOs.

The RCOs then enter into a contract (a “Risk Contract”) with Medicaid to provide medical services to Medicaid beneficiaries. Payments are made to the RCOs on a per-beneficiary (“capitated”) basis, regardless of the care received or services rendered. If the cost of care exceeds the payments made by Medicaid, then the RCO must absorb the loss. If the cost of care is below the payments made, then the RCO would keep the surplus.

I. Establishment of Regional Care Organizations (Section 2)

A. Purpose

RCOs may only serve Medicaid beneficiaries. Section 2(a), page 3, lines 8-10. RCOs are not considered to be insurance companies. Section 2(b), page 3, lines 11-13. As such, although RCOs may resemble insurance companies in certain respects, they will be regulated by Medicaid.

B. Structure

RCOs must have governing boards that are approved by Medicaid. Section 2(c)(2), page 4, lines 3-7. At least sixty percent (60%) of the members of the board must be participants in the organization - either as providers or as contributors of capital. Section 2(c)(1), page 3, line 15. No particular provider group may make up a majority of the board, and each board must include at least two (2) physicians, two (2) hospital representatives, one (1) dentist, one (1) optometrist, and one (1) pharmacist. Section 2(c), page 3, line 19. Although SB340 provides in Section 10 that long-term care delivery system will be integrated into the revamped program by October 1, 2017, the bill makes no provision for the inclusion of long-term care representatives on an RCO board.

The board must also include the chair of a Citizen's Advisory Board which must be established in each region. Section 2(c), page 3, line 26. The make-up and functions of the Citizen's Advisory Board is found at Section 2(d), page 4, lines 8-20. At least 20% of the members of an RCO’s Citizen’s Advisory Board must be Medicaid beneficiaries enrolled by the RCO.

RCOs must maintain reserves of at least $250,000 in restricted reserves and $2.5 million in capital and/or surplus. Section 2(e), page 4, line 21. RCOs must make financial and, to the extent permissible under HIPAA, medical data reports to Medicaid. Section 2(f)-(g), page 5, lines 10-16.

II. Establishment of Medicaid Regions (Section 3) Section 3 provides that Medicaid establish by rule not more than eight (8) regions in the State for the operation of RCO's. Each region must be capable of supporting at least two (2) RCOs. Section 3, page 5, line 17-23.

III. Mechanics of the Provision of Care

A. Regional Care Organizations

In the first instance, the bill contemplates that care would be provided to Medicaid beneficiaries through the RCOs operating in each region. Under certain circumstances, Medicaid may enter into a contract with a managed care company (referred to in SB340 as an “alternate care provider”) (an “Alternate Care Provider”); however, as currently drafted, it appears that SB340 would only allow for a contract to be entered into with an Alternate Care Provider after an RCO was terminated, or failed to deliver adequate care within a region.

While there is nothing in SB340 that would prohibit an RCO from entering into a contract with a managed care company to provide services, as a practical matter, the requirements regarding the membership of the RCO governing bodies appear to make this unlikely.

Section 4(a) of the bill states that Medicaid: shall enter into a contract in each Medicaid region for at least one fully certified regional care organization to provide, pursuant to risk contract, under which the Medicaid Agency makes a capitated payment, medical care to Medicaid beneficiaries.

Section 4(a), page 5, line 24 - page 6, line 11. Section 4(a) sets forth factors that must be met for Medicaid to enter into a contract with an RCO. For example, the RCO must be “fully certified.” Additionally, Medicaid must conclude that the services provided pursuant to the contract will be “better, more efficient and less costly than under the then existing care delivery system.” Obviously, this language vests Medicaid with broad discretion in determining when an RCO is fit to serve a region. However, because the section states that Medicaid “shall enter into a contract,” it does not appear that Medicaid can choose not to contract with at least one RCO in each region initially.

Initial contracts between Medicaid and an RCO would be for three (3) years, with an option for Medicaid to renew for not more than two additional one-year periods. Section 5, page 8, line 10. Medicaid must obtain an independent evaluation of the performance of an RCO in order to determine whether to contract with the RCO for an additional period. It is not clear whether a subsequent contract with an RCO must be for three (3) years with two one (1) year options, or if some other term would be appropriate.

C. Assignment of Enrollees and Establishment of a Network

Medicaid is to enroll beneficiaries in the RCOs. If a region has more than one RCO, then the beneficiary may choose the RCO. If no election is made by a beneficiary, then Medicaid must assign the person to an RCO. Section 4(b), page 6, line 12-19.

RCOs must establish a network of providers to care for their enrolled Medicaid beneficiaries. In the event a managed care organization (alternate care provider) is utilized in a region, that entity also must establish a network. Section 4(c), page 6, lines 20-26.

RCO's must contract with "any willing hospital, doctor, or other provider . . . if the provider is willing to accept the payments and terms offered comparable providers." Section 8, page 9, lines 20-25.

D. Additional Requirements Placed on the Medicaid Agency

Medicaid must also do the following: 1) Establish a grievance process for enrollees. Section 4(d). 2) Establish a process for certification of RCOs, both probationary and full. Section 4(e)(1). 3) Establish quality standards, minimum medical service delivery requirements and quality assurance provisions. Sections 4(e)(2) - (3). 4) Establish technology and data analytics requirements for RCOs. Section 4(e)(4). 5) Conduct financial audits of RCOs. Section 4(e)(5).

E. Contracts with Managed Care Organizations (Alternate Care Providers)

Section 6 of the bill sets forth the circumstances under which Medicaid may contract with a managed care organization. According to that section, Medicaid “may contract with an alternate care provider in a Medicaid region if a regional care organization has failed to provide adequate service pursuant to its contract, or if the certification of a regional care organization is terminated or never granted.” Section 6, page 8, line 21-25.

Thus, Section 6 provides the three circumstances under which Medicaid may contract with a managed care company to provide service in a particular region: (1) if an RCO has failed to deliver adequate services; (2) if an RCO’s certification is terminated; or (3) if an RCO is never certified for a region. However, as noted above, Section 4 - which requires Medicaid to contract with at least one RCO in each Medicaid region - appears to preclude circumstance (3), where an RCO is never certified. In other words, if Medicaid complies with Section 4, and enters into a contract with at least one “fully certified” RCO in each region, then there will not be any circumstance where certification of an RCO in a region is “never granted.”

F. Termination of an RCO

Medicaid must establish a procedure for the termination of an RCO, which includes the right to a hearing and an appeal to the Alabama Court of Civil Appeals. Section 7(a) - (b), page 9. “Upon termination [of an RCO], the Medicaid Agency may contract with an alternative [sic] provider . . .” Section 7(c), page 9, lines 16-19.

IV. Timeline for Implementation (Section 9) October 1, 2013: Medicaid must establish not more than eight (8) regions. October 1, 2014: Organizations seeking recognition as an RCO must have in place their governing board as approved by Medicaid. Once this is submitted, an organization may receive from Medicaid probationary certification as an RCO. Probationary certification may not last more than three (3) years. April 1, 2015: Ability to establish an adequate service delivery network must be demonstrated to Medicaid by certified (probationary) RCOs. October 1, 2015: Financial solvency requirements must be met by certified (Probationary) RCOs. October 1, 2016: Ability to provide medical services pursuant to a contract must be demonstrated to Medicaid by an RCO.

V. Integration of Long Term Care (Section 10) Section 10 (page 11) of the bill directs Medicaid to conduct a study of the long-term care system and report to the Legislature and the Governor by October 1, 2014. The delivery of long-term care must be integrated into the regional care system by October 1, 2017.