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The Initial Effects of TennCare on Academic Health Centers


Academic health centers (AHCs) have a dual mission to care for the sickest patients and achieve excellence in patient care, research, and education. In today's competitive managed care environment, these costly services put them at a disadvantage, and many are scrambling for ways to become more efficient.

This case study of the University of Tennessee Health Sciences Center and Meharry Medical Center evaluates the impact of TennCare, the state's Medicaid managed care plan, and identifies important lessons that may show how the changing health care system will affect AHCs in other states.

TennCare, implemented virtually overnight on January 1, 1994, enrolled 25 percent of the state's population, including all Medicaid patients and low-income uninsured people, into managed care plans. Academic health centers in Tennessee have experienced long-term fallout from the transition. As large providers of Medicaid services, they are dependent on the program for clinical patients, revenues, and supplemental payments to offset the costs of charity care and graduate medical education.

The program has had mixed results. The state's goals of containing costs and expanding access were met in FY 1995, when it saw a billion dollars in savings and an increase of 438,000 in the Medicaid rolls. The first months, however, were a time of chaos—patients did not know where to go for care, health plans did not know who was enrolled or assigned to their care. Many providers have never been compensated for their services during that time. In addition, the traditional roles of the state's academic health centers (AHCs), which care for the sickest and poorest patients, conduct biomedical research, and educate the health care workforce, have been threatened.

Because TennCare was implemented in the context of a relatively immature private sector market, it presents a unique opportunity to examine the effect of public sector-driven health care reform on academic health centers. This report contains information gleaned from a review of the pertinent documentation and interviews of AHC executives and staff, state officials, and representatives of managed care organizations.

Since the inception of TennCare, the centers studied have experienced significant revenue shortfalls, the closure of some specialty services, loss of patent volumes for clinical research, and reduction in training program positions. Five critical challenges face the AHCs: decreased payments for services; decreased volumes of clinical services; decreased market share of the Medicaid population; adverse selection; and loss of graduate medical education payments, disproportionate share hospital payments, and capital funds.vThe first challenge derives from the translation of the program's spending cap into lower per service payments. One AHC saw its Medicaid revenues declining from 65 cents per $1.00 before TennCare to 38 cents per $1.00 after TennCare. AHCs also reported decreased volumes of clinical services—including reductions of 15 to 20 percent in hospital lengths of stay and emergency room utilization—and a significant loss of Medicaid and medically indigent populations, which had formerly comprised a large portion of their inpatient and outpatient cases. During the rapid and tumultuous transition to TennCare, one AHC was assigned only 20% of its former Medicaid population.

The centers also reported the occurrence of "adverse selection" resulting from the sickest patients opting for AHC care when given a choice of providers. One center studied by the authors saw OB-GYN deliveries decrease from 8,000 to 4,000, of whom 3,500 were high-risk patients. Adverse selection means a greater proportion of patients tend to be sicker, but payments from managed care organization may not cover the increased expenses of caring for them.

The uncertainty surrounding Medicaid payments has been particularly difficult for Tennessee's AHCs. As large providers of Medicaid services, they are dependent on the program for supplemental payments to offset the costs of charity care (called disproportionate share hospital payments, or DSH), payments for graduate medical education (GME), and capital funds. Under TennCare, DSH and GME payments were suspended, and payments for services covered by Medicaid were reduced. Although this funding was eventually restored, the temporary suspension of payments resulted in a loss of $20 million for the centers in 1995.
The positive effects of TennCare must also be considered, including the cost-savings to the state and extension of care to more uninsured people. Potential future benefits for AHCs may include the integration of community-based services into academic missions, the acceleration of clinical diversification, and the attainment of experience in managed care.

Like AHCs facing private sector reform, the centers facing TennCare have developed a number of strategies to deal with the challenges of health care reform. They are taking measures to increase the sale of clinical services through networking and product line development; reducing the costs of producing clinical services and of education and research; networking with government; and developing new markets for their special missions. During the initial years of TennCare, two AHC-based managed care organizations were formed in the state, and centers successfully lobbied to restore special funding for GME.

The challenges of public sector health care reform for AHCs are in some ways similar to those of private sector reform. Important differences include the rapidity with which the public sector can transform the AHC market, the centers' vulnerability to such special payments as GME and DSH, and the accountability of managers of public sector initiatives to the political process.

The long-term consequences of TennCare for the academic missions of AHCs and the welfare of local populations will undoubtedly be both negative and positive. As experience with the TennCare revolution and other public sector health care reform initiatives evolve, their impact on AHCs and their teaching, research, and vulnerable care missions should be followed closely.

Recent reports suggest that a final chapter to the TennCare experience has not yet been written. Because the state closed enrollment of TennCare to the uninsured at the beginning of 1995 and began more strictly enforcing premium collection, the number of newly covered has been reduced. A definitive evaluation must await the test of time.

Publication Details



The Initial Effects of TennCare on Academic Health Centers, Gregg S. Meyer and David Blumenthal, The Commonwealth Fund, November 1996