Cover: HMOs for Medicaid

HMOs for Medicaid

The Road to Financial Independence is Often Poorly Paved

by Joan L. Buchanan, Phoebe Lindsey Barton, Arleen Leibowitz, Allyson Ross Davies

Purchase Print Copy

 FormatList Price
Add to Cart Paperback Free

During the 1980s both the federal government and the private sector articulated policies to encourage the development and participation of health maintenance organizations (HMOs) in the Medicaid program. However, the policies, intended to save costs, limited the ability of new HMOs to achieve financial independence. New plans that emphasize Medicaid participation have few, if any, options on benefit design or in setting capitation rates. Relative to fee-for-service Medicaid programs, their costs to provide services may be quite high, as they have neither the buying power nor the ability to impose discounts. As a consequence, plans must focus their financial planning efforts on targeting and attaining a stable enrollment base and on controlling the amount of services provided, tasks that are difficult for all HMOs. Achieving a stable enrollment base is particularly hard because Medicaid eligibles have few incentives to enroll and once enrolled often lose their Medicaid eligibility. Traditional HMOs control the amount of services provided through physician selection, financial incentives on physicians, and monitoring and utilization review. Lack of information and the difficulty inherent in attracting sufficient provider participation limit the first two strategies, so new plans often adopt organization structures that rely heavily on monitoring activities. Unfortunately, management information systems for HMOs are often the weakest link. The authors discuss the tasks and present data on financial planning, on putting financial plans into operation, and on monitoring progress toward financial independence for a set of ten demonstration projects sponsored by the Robert Wood Johnson Foundation.

Originally published in: Journal of Health Politics, Policy and Law, v. 17, no. 1, Spring 1992, pp. 71-96.

This report is part of the RAND Corporation Reprint series. The Reprint was a product of the RAND Corporation from 1992 to 2011 that represented previously published journal articles, book chapters, and reports with the permission of the publisher. RAND reprints were formally reviewed in accordance with the publisher's editorial policy and compliant with RAND's rigorous quality assurance standards for quality and objectivity. For select current RAND journal articles, see External Publications.

This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited; linking directly to this product page is encouraged. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial purposes. For information on reprint and reuse permissions, please visit

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.