Medicaid is around 20% of the Hawaii state budget and including federal contributions, it is a $2.3 billion per year program. Much of this money is being wasted on administrative costs and obstructions that do not benefit delivery of care to those who need it.

Hawaii contracts Medicaid to five Managed Care Organizations (MCOs), two of which are mainland for-profit insurance companies. MCOs claim managed care will improve access and care coordination and control cost, but their most notable achievements have been to drive most independent doctors out of accepting new Medicaid patients, reduced access to care (especially on the neighbor islands), and relentless escalation in cost above the national average.

Strong evidence both nationally and locally shows the largest driver of increased cost in health care is excessive administrative cost, not overuse of care, yet the MCOs have added costly administrative hurdles such as prior authorizations and formulary restrictions designed to restrict use of care. The more health plans try to manage care, the more physicians refuse to participate, and when a dominant insurer such as HMSA and our Medicaid program are both over-managing care, the result is a rapidly worsening physician shortage.

The simple truth is that contracting Medicaid to private insurance companies increases administrative burdens, restricts access to care for those who need it, drives doctors out, and raises cost.

There are three federally recognized models for organizing state Medicaid programs:

1) Unmanaged fee-for-service (FFS), in place in Hawaii until 1994 and until 2009 for the aged/blind/disabled category;

2) Contracting Medicaid out to private MCOs that take on full insurance risk (Hawaii’s current model); and

3) Primary Care Case Management (PCCM), with the state retaining insurance risk and paying primary care doctors extra to manage care instead of using insurance companies.

Head-to-head comparisons show that of these, MCOs are the least cost-effective, followed by unmanaged fee-for-service, and PCCM is the most cost-effective. Every state that has converted from FFS to MCOs , including Hawaii, has seen relentless cost increases. The MCOs invariably claim they are saving the states money compared to imaginary projections of spending without them, but when administrative costs are included, the total cost always goes up.

Two states, Oklahoma and Connecticut, converted from managed care to primary care case management. Both discovered PCCM led to substantial improvement in physician participation and access to care, along with reduced emergency visits and hospitalizations. And both realized significant reduction in total per member Medicaid cost, with much of the reduction due to reduced administrative costs.

A majority of state Medicaid programs now contract with MCOs, but this is not based on any evidence that MCOs are more cost-effective. The reasons are ideological/political (a false belief that privatization is inherently more cost-effective) and in response to lobbying by insurance industry special interests.

Obtaining accurate financial information from managed care plans is notoriously difficult, and accountability is lacking. There are multiple national reports of corporate fraud in Medicaid managed care, including by some of the plans doing business in Hawaii. Managed care plans can “spin” financial reports to make themselves look good, but the bottom line is always the same — deteriorating access to care and rising Medicaid costs.

It is high time Hawaii’s Medicaid program seriously considered switching from MCOs to PCCM, improving physician participation and access to care while saving taxpayers well over $100 million per year.

Stephen B. Kemble, M.D., is a past president of the Hawaii Psychiatric Medical Association and of the Hawaii Medical Association.