Lessons Learned From Arizona's Prepaid Program

HRD-87-14: Published: Mar 6, 1987. Publicly Released: Mar 6, 1987.

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GAO reviewed the first 3 years of the Arizona Health Care Cost Containment System's (AHCCCS) operation to examine Arizona's approach to: (1) competitive bidding for procuring health plan contracts; (2) collection of utilization data from prepaid plans on the health care services provided; and (3) financial oversight of prepaid health plans.

GAO found that portions of the AHCCCS procurement design conflicted with its objective of demonstrating the cost-effectiveness of competitive bidding for prepaid capitated contracts because: (1) AHCCCS awarded more contracts than necessary to serve Medicaid recipients, decreasing competitiveness among bidders; (2) limited local cost and utilization data increased bidders' risks; and (3) state statutes forced AHCCCS to substitute a voluntary price reduction method after publicizing bids, which may have resulted in less competition. GAO observed that AHCCCS: (1) had difficulty in collecting utilization data; (2) did not have sufficient time to develop adequate financial and utilization reporting systems; (3) did not evaluate health plans' abilities to collect complete and reliable cost and utilization data before awarding contracts; and (4) established financial penalties to enforce reporting requirements. GAO also found that the Health Care Financing Administration (HCFA) and Arizona did not provide adequate financial oversight in the first few years of AHCCCS and, as a result, AHCCCS plans neither complied with federal disclosure requirements nor filed state-mandated financial reports.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: HHS agreed that fostering price competition is important and it should develop criteria for evaluating the adequacy of procurement systems, but did not agree that limits were needed on the number of contracts awarded in order to foster price competition. Followup review of the AHCCCS program is being initiated.

    Recommendation: The Secretary of Health and Human Services should, in establishing regulations to implement the preapproval provisions of the Omnibus Budget Reconciliation Act of 1986, develop criteria to be used in evaluating the adequacy of price competition and the reasonableness of contract prices.

    Agency Affected: Department of Health and Human Services

  2. Status: Closed - Implemented

    Comments: HHS indicated that it has no plans to fully implement this recommendation. A similar recommendation will be made in a forthcoming report on Chicago health maintenance organizations.

    Recommendation: The Secretary of Health and Human Services should develop guidelines for reviewing contracts that provide for an assessment of, among other things, whether the Medicaid agency has: (1) adequately specified utilization and data reporting requirements; (2) evaluated prepaid health plans' capabilities to produce timely and accurate utilization data; (3) established procedures for providing technical assistance to health plans in meeting reporting requirements; (4) established adequate penalties for noncompliance with the reporting requirements; (5) specified routine financial reporting and disclosure requirements in the contract; (6) reviewed the financial qualifications of the proposed contractors; and (7) determined that federal financial disclosure requirements have been met. In addition, the guidelines should condition renewal or extension of contracts on adequate financial oversight of the contractors by the state Medicaid agency.

    Agency Affected: Department of Health and Human Services


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