Opinion - Congress should look to Tennessee as an example for Medicaid reform

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As Congress wrestles with the need to trim spending, attention has turned to Medicaid, and to a lesser extent, Medicare.
These are hardly new issues. Within seven years of the 1965 enactment of Medicaid, for those eligible for federal income support (largely those in poverty), and Medicare, primarily for those eligible for Social Security, Congress in 1972 turned its attention to concerns about containing costs in those programs.
Tennessee has been a pioneer in managing its Medicaid costs, and Congress might benefit from the Tennessee experience with TennCare, the state's Medicaid program.
About 30 years ago, Tennessee faced unsustainable annual increases in its Medicaid program. A popular Democratic governor, Ned McWherter, called the state's Medicaid program the Pac Man of the state's budget. He sought to find a way to pay for the Medicaid increases through a state income tax (Tennessee does not have one) but failed. The TennCare program was designed to address the issue by containing the rate of increase in costs.
Tennessee received a waiver so that it could implement a universal and mandatory managed care program. Tennessee had no managed care in Medicaid, and a move to 100 percent managed care was projected to reduce costs by 20-25 percent on a recurring basis. Support from patient advocates was secured by agreeing that cost savings would be used to increase access to Medicaid to previously uncovered persons.
The mandatory Medicaid managed care program was deemed such a success that, in 1997, Congress allowed states to implement Medicaid managed care without a waiver. Managed care introduced economic considerations into the process of medical decision-making. While the cost savings projections were pretty much on target; once those savings were fully realized, the projections recognized that the rate of cost escalation would be restored, albeit from a lower cost basis. That projection also turned out to be pretty accurate.
A Republican governor, Don Sundquist, succeeded McWherter and unsuccessfully sought to implement an income tax. Another wonderful Democratic governor, Phil Bredesen, was elected to succeed Sundquist under a promise not to seek an income tax. Bredesen was determined to find a way to manage down the rate of increase of Medicaid spending. I served as his outside counsel.
A reform team determined that the target for reform should focus on the concept of 'medical necessity.' That insight was informed by work I had done as part of an Institute of Medicine study group, which looked at hospital staffing in a system that had recently merged three hospitals. There were three distinct models, and no consensus about which was the 'right' one.
Traditionally, the concept of 'medical necessity' was the term used to define the scope of benefits under health plans, including Medicaid. The concept assumed that there was a single correct way of practicing medicine, and that it had a justification based on scientific consensus. But the existence of clinical uncertainty called into question that traditional view. As it turned out, many alternatives were available at varying costs, and evidence of superiority of one particular approach was often lacking.
Those insights led to the policy conclusion that, if a more expensive alternative were proposed, the state should not pay for that more expensive alternative unless there was good scientific evidence that it was superior and worth the additional cost. If an aspirin were adequate, it should be used instead of a more expensive prescription-based alternative. If an adequate outpatient procedure were available at lower cost, TennCare should not pay for a more expensive inpatient option.
These insights resulted in a TennCare definition of 'medical necessity' that could serve as a national model at considerable (but hard to measure) cost savings. That definition has been in place for nearly 20 years and has been approved by a federal court. TennCare has kept costs manageable so that the state has been able to live within existing sources of revenue, and the state even proposed to accept financial risk if it could share in the cost savings from TennCare above a projected baseline.
The TennCare definition includes the traditional requirement that a medical item or service be recommended by a treating physician (no doctor shopping) and that it be 'safe and effective.' The reasonably anticipated medical benefits must 'outweigh' the reasonably anticipated medical risks 'based on the enrollee's condition and scientifically supported evidence' to be covered under TennCare. That is, a medically based risk-benefit calculation is a requirement as part of medical decision-making.
The innovative aspects have three components.
First, a medical item or service must be required 'in order to diagnose or treat an enrollee's medical condition.' That circumscribes the type of item or service covered under the program.
Second, the medical item or service must be the 'least costly alternative course of diagnosis or treatment.' That expressly incorporates economic factors into medical decision-making. An alternative course of diagnosis or treatment 'may include observation, lifestyle or behavioral changes, or, where appropriate, no treatment at all.' If an item or service can be safely provided in an outpatient setting at lower cost, then that is what TennCare will pay for. More expensive inpatient treatment is not 'medically necessary.'
Third, the less costly alternative need only be 'adequate for the medical condition of the enrollee.' The yardstick is not the best possible standard or some comparison with private plans. The standard of 'adequacy' means that sub-standard medicine is not acceptable, but that some differences between benefits for TennCare enrollees and those on private plans are acceptable.
These innovations were controversial 20 years ago, when proposed and enacted, but they have become part of the fabric of TennCare and have been in place successfully for two decades. They help shape the medical decision-making culture that costs are to be considered and that the issue is the adequacy of care not what might be available in some private plans. That type of modest stratification, by the way, is expressly endorsed in the Affordable Care Act. Section 1302(b)(5) expressly allows for supplementation by health plans beyond the essential health benefits mandated by the Affordable Care Act.
In the discussions that led to these reforms, the estimated range of savings was from 1 percent to 5 percent of total Medicaid spending. In an environment in which a program entails large expenditures, even a 1 percent per year savings could be considerable.
James F. Blumstein is University Distinguished Professor at Vanderbilt Law School and the director of Vanderbilt's Health Policy Center.
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