This document discusses the evolution of Medicaid managed care in the United States from 1965 to 2005. It summarizes that initially, only a few states experimented with Medicaid managed care, with California's efforts leading to calls for reform due to low quality of care. In response, federal policymakers independently enacted laws in the 1970s and 1980s to regulate quality in Medicaid managed care arrangements, asserting more control over this growing part of the healthcare system. The document argues that despite Medicaid's design emphasizing state control, federal actors played a decisive role similar to their role in Medicare, displaying independence in shaping Medicaid managed care policy.

1. 1
Isaac Lederman 4/11/14
WWS 333 Starr
Managing Quality: The Politics of Medicaid Managed Care
Word Count: 3144
In the last four decades a revolution has occurred in American medicine.1
This
revolution has fundamentally transformed the provision of healthcare in the United
States. Even the Patient Protection and Affordable Care Act (PPACA), the most
significant healthcare reform effort since the passage of Medicare and Medicaid in 1965,
relies on what grew out of this revolution.2
This seismic change is what scholars refer to as the “managed care” revolution.3
In essence, it has involved the integration of two previously separate functions: the
payment for and provision of medical services, as states give a certain amount of money
per enrollee per month to managed care plans that limit clients to a network of providers.4
Though managed care has risen to prominence in both Medicare and Medicaid, this paper
will focus on Medicaid.5
In particular, this paper will depart from previous work on the
1
Paul Starr, Remedy and Reaction: The Peculiar American Struggle over Health Care
Reform (New Haven: Yale University Press, 2013), 66.
2
Caroline F. Pearson, "Analysis: Medicaid Plans Expected to Grow 20% This Year
Under ACA Expansion," Avalere Health LLC, January 15, 2014,
http://avalerehealth.net/expertise/managed-care/insights/analysis-medicaid-plans-
expected-to-grow-20-this-year-under-aca-expansion.
See also Peter Baker, "For Obama Presidency, Lyndon Johnson Looms Large," New
York Times, April 8, 2014, http://www.nytimes.com/2014/04/09/us/politics/for-obama-
presidency-lyndon-b-johnson-looms-large.html?_r=0.
3
Starr, 66.
4
Jacob S. Hacker and Theodore R. Marmor, "The Misleading Language of Managed
Care," Journal of Health Politics, Policy and Law 24, no. 5 (October 1999): 1036.
See also Leslie Clement, Medicaid Managed Care: What This Means for Idaho, PDF,
Boise: Idaho Department of Health and Welfare, 2011.
5
Carlos Zarabozo, "Milestones in Medicare Managed Care," Health Care Financing
Review 22, no. 1 (Fall 2000): 65.

2. 2
politics of Medicaid managed care by examining action on the federal, not state, level.6
Beyond that, it will bring the sparse scholarship on this topic up to date.7
In accomplishing these goals, this paper will show that though Medicaid differs a
great deal from its much beloved twin, Medicare, the politics of Medicaid managed care
mirror those of Medicare, as state actors play a decisive role in both. This is evident in
the evolution of the laws governing the quality of care in managed care arrangements, an
evolution that underscores the nature of the institution that is Medicaid managed care.
Scholars have proposed a number of theories to explain institutional patterns.8
Some contend that elections drive policy change.9
In other words, politicians will either
adjust policy to win reelection or act on the basis of a mandate from the public to alter
policy.10
Popular influence could enter policymaking through other channels. Another
school of thought argues that politicians respond to either established or anticipated
6
David J. Randall, "The Politics of Medicaid Contracting and Privatization" (diss., Kent
State University, 2012), 3.
See also Etienne E. Pracht, "State Medicaid Managed Care Enrollment: Understanding
the Political Calculus That Drives Medicaid Managed Care Reforms," Journal of Health
Politics, Policy and Law 32, no. 4 (August 2007): 686.
Also see Ethan M. Bernick, "The Politics of States’ Medicaid Managed Care: 1981-
1998" (diss., The Florida State University, 2002), ix.
See as well Thomas R. Oliver, "The Collision of Economics and Politics in Medicaid
Managed Care: Reflections on the Course of Reform in Maryland," The Milbank
Quarterly 76, no. 1 (January 1998): 61.
7
James W. Fossett and Frank J. Thompson, "Back-Off Not Backlash in Medicaid
Managed Care," Journal of Health Politics, Policy and Law 24, no. 5 (October 1999):
1170.
8
The term “institution” is used here to mean a set of rules and practices that regulate
social interaction.
9
Jonathan Oberlander, The Political Life of Medicare (Chicago: University of Chicago
Press, 2003), 137.
10
Ibid., 137-138.

3. 3
public opinion.11
That is to say, political actors will craft policy that is consistent with the
wishes of the people.
Others are less sanguine about the democratic nature of policymaking. According
to one group of theorists, politicians bow to well-organized interest groups with a stake in
policy change.12
Furthermore, there are those who assert that state actors are independent
of both interest groups and public opinion.13
In short, policymakers do as they please.
Moreover, yet another set of scholars maintains that past decisions constrain future
choices.14
In this view, seemingly small decisions about institutional design and
development have significant ramifications later on. Lastly, others stress the importance
of ideas.15
Policymakers in their opinion cannot escape the influence of ideas about the
character of either their nation or the particular program they oversee.16
Though all these theories do to some degree explain the politics of Medicare, state
actors play a particularly decisive role. As Jonathan Oberlander notes about the period
from Medicare’s inception in 1965 to 1994, there is “substantial evidence” indicating
that policymakers act independently.17
Nevertheless, Oberlander does not dismiss the
other theories discussed above. For him, they too are key to understanding Medicare.18
Though less has been written about the period after 1994 and the politics of the program
11
Ibid., 140.
12
Ibid., 145.
13
Ibid., 148.
14
Ibid., 151.
See also Paul Starr, The Creation of the Media: Political Origins of Modern
Communications (New York: Basic Books, 2004), 4-5.
See as well Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins
of Power, Prosperity, and Poverty (New York: Crown Publishers, 2012), 106-107.
15
Oberlander, 155.
16
Ibid., 155-156.
17
Ibid., 148.
18
Ibid., 156.

4. 4
changed after that date, it seems reasonable to conclude that government actors will
continue to be instrumental in understanding the institutional patterns of Medicare.19
It is unclear, however, whether the same can be said of Medicaid, in general, and
Medicaid managed care, in particular.20
Though Medicare and Medicaid arose out of the
same legislation in 1965, the two could not be more different. In particular, Medicaid has
a rather unique design and serves a similarly unique set of constituencies. The history that
follows tells not only of Medicaid’s beginnings but also of its adoption of managed care
and the evolution of laws governing the quality of care in managed care arrangements
between 1965 and 2005.
Medicaid’s institutional framework provides good reason to believe that its
politics should stand in stark contrast to those of Medicare. Medicaid’s architects built it
to provide health insurance to the “deserving poor.” 21
Though this meant that Medicaid
provided health insurance to a small subset of low-income individuals deemed eligible
for public assistance, it acquired a different significance in the public imagination. While
Medicare served “worthy” Americans at the end of their careers, Medicaid amounted to
welfare for the deadbeats destined to live on the public dole.22
Medicaid’s architects also differentiated it from Medicare by making the program
a joint federal-state partnership. While states have no say in the running of Medicare,
19
Ibid.
20
Medicaid in general is beyond the scope of this paper, as I am focusing exclusively on
the institutional patterns of Medicaid managed care.
21
Nicole Huberfield, "Federalizing Medicaid," Journal of Constitutional Law 14, no. 2
(December 2011): 445.
22
Carolyn L. Engelhard, "The Politics of Medicaid," Inquiry, The Journal of Health Care
Organization Provision and Financing 48, no. 4 (Winter 2011/2012): 340.

5. 5
they do have a great deal of say in the running of Medicaid.23
Though the federal
government sets some requirements and attaches some conditions to the funds it allocates
to states, states, for the most part, have the right to administer Medicaid as they please.24
This feature of Medicaid’s institutional architecture also results in a different sort of
program politics than is evident in Medicare, as states continue to assert their right to run
the program free of federal control.25
Thus on the basis of design alone it seems
reasonable to expect that the politics of Medicaid should differ significantly from those
present in its much beloved twin, Medicare.
The history of Medicaid managed care does not appear to bear out this
expectation. At least with respect to the laws governing the quality of care in managed
care arrangements, Medicaid resembles its twin. In all three phases of Medicaid’s
relationship with managed care, policymakers on the federal level exercised a tremendous
degree of independence. That is not to say that the numerous explanations described
above are bunk, but rather that they pale in comparison to state-centered theories.
Though policymakers at first struggled to ensure that managed care arrangements
delivered quality care to Medicaid beneficiaries, by 1981 they had begun to assert their
control over this new and somewhat frightening part of the American healthcare
ecosystem. In the sixteen years after the passage of Medicaid, managed care did not enjoy
23
Karl Kronebusch, "Medicaid and the Politics of Groups: Recipients, Providers and
Policy Making," Journal of Health Politics, Policy and Law 22, no. 3 (June 1997): 841.
24
Huberfield, 445-447.
25
567 U. S. ____ (2012)

6. 6
great popularity. Only a few states, most notably California, dared to experiment with this
novel institution.26
After California’s blunders with Medicaid managed care led to calls for reforms,
policymakers on the federal level acted independently. In 1971, Ronald Reagan, then
governor of California, signed legislation into law that aimed to stimulate the growth of
prepaid medical plans (PHPs).27
Because California would only give a certain amount of
money to the plans per Medicaid beneficiary per month (thus “prepaid”), the PHPs would
have an incentive to provide high quality care at low cost.28
As the legislation’s author
explained, this was “an attempt to provide quality care to the needy while at the same
time tightening controls to prevent runaway costs.”29
This legislation failed in that PHPs did not deliver quality care. A “gold rush” in
the words of the Los Angeles Times ensued, because no regulations governed the quality
of care provided by the PHPs.30
That is to say, plans were reaping huge profits, because
they were skimping on quality while lowering costs dramatically. In some instances, the
care was so shoddy it was no longer even care. Thus a Medicaid beneficiary could go to a
24-hour emergency clinic at night only to find it closed.31
26
Michael Sparer, Medicaid Managed Care: Costs, Access, and Quality of Care, report
no. 23, Research Synthesis (Princeton, NJ: Robert Wood Johnson Foundation, 2012), 3.
27
William Endicott, "Assembly Passes New Medi-Cal Measure, Sends It to
Governor," Los Angeles Times, August 13, 1971.
28
In addition, the plans would limit their enrollees to a network of providers.
National Council on Disability, "Appendix A. Glossary of Terms," National Council
on Disability, Prepaid Health Plan,
http://www.ncd.gov/publications/2013/20130315/20130513_AppendixA.
29
Endicott.
30
Robert Fairbanks, "New Gold Rush---Prepaid Medi-Cal Franchises Sought: Prepaid
Medi-Cal Stirs Sacramento Gold Rush," Los Angeles Times, December 10, 1972.
31
Endicott.

7. 7
In 1973 and 1976 policymakers on the federal level displayed their independence
in their response to these worrisome reports. In 1973 interest groups neither mobilized
nor defined in any substantial way the first requirements for Medicaid managed care
plans.32
The key players really were Senator Edward Kennedy (D-MA) and Congressman
William Roy (D-KS), who pushed these requirements for what were then known as
health maintenance organizations (HMOs) through Congress.33
In 1976 Congress passed even more stringent requirements, most notably the
“50/50 rule.” This rule stipulated that Medicaid and/or Medicare beneficiaries could
constitute no more than half of the enrollees in a Medicaid plan.34
The idea was that
private purchasers, mainly employers, would ensure plans provided high quality care to
the privately insured.35
As before, state actors were decisive in the passage of these regulations. Interest
groups representing various constituencies, especially managed care organizations
(MCOs), however, won nearly all of the provisions they sought.36
Nevertheless, the very
32
David Strang and Ellen M. Bradburn, "Theorizing Legitimacy or Legitimating Theory?
Institutional Analysis, ed. John L. Campbell and Ove K. Pedersen (Princeton, NJ:
Princeton University Press, 2001), 135.
See also Medicaid and CHIP Payment and Access Commission, Report to the
Congress: The Evolution of Managed Care in Medicaid, report (Washington D.C.:
Medicaid and CHIP Payment and Access Commission, 2011), 18.
33
Joseph L. Dorsey, "The Health Maintenance Organization Act of 1973 (P.L. 93-222)
and Prepaid Group Practice Plans," Medical Care 13, no. 1 (January 1975): 8.
34
Medicaid and CHIP Payment and Access Commission, 18.
35
Prospective Payment Assessment Commission, Report to the Congress: Medicare and
the American Health Care System (Washington, D.C.: Prospective Payment Assessment
Commission, 1997), 42.
36
Lawrence D. Brown, Politics and Health Care Organization: HMOs as Federal
Policy (Washington, D.C.: Brookings Institution, 1983), 356-357.
See also Jan Coombs, The Rise and Fall of HMOs: An American Health Care
Revolution (Madison, WI: University of Wisconsin Press, 2005), 55.

8. 8
fact that MCOs agreed to even more regulation by the federal government underscores
the state-driven nature of reform.
Between 1981 and 1997 policymakers on the federal level, now more comfortable
with managed care arrangements, encouraged experimentation and competition on the
state level in the hope that together these would lead to quality care. Just as he had done
as governor of California, Reagan as president in 1981 evinced great faith in the power of
MCOs. Under the direction of his administration, Congress in 1981 rolled back a large
number of the regulations on MCOs it had put in place only a few years earlier.37
The
50/50 rule, for instance, became the 75/25 rule in 1981, as Medicaid and/or Medicare
beneficiaries could now constitute three quarters of the enrollees in a Medicaid plan.38
Medicaid MCOs, in other words, did not require much oversight at all, as the market
provided incentive enough for them to deliver quality care.
Though these changes did, to some degree, reflect new understandings of the
market, they bore Reagan’s imprint. As Daniel Rodgers notes, “In an age when words
took on magical properties, no word flew higher or assumed a greater aura of
enchantment than ‘market.’”39
While Rodgers is certainly correct that ideas about the
power of markets were gaining currency at this time, ideas alone cannot account for all
shifts in policy. After all, as explained above, in 1971, well before the rise of free market
thinking, Reagan was pursuing policy along these lines in California. And Reagan
37
Sparer, 3.
38
Ibid.
See also Medicaid and CHIP Payment and Access Commission, 18.
39
Daniel T. Rodgers, Age of Fracture (Cambridge, MA: Belknap Press of Harvard
University Press, 2011), 41.

9. 9
continued to pursue policy along these lines as president a decade later, despite strong
objections from various interest groups.40
While these policies led to experimentation and arguably higher quality care, they
were not responsible for the tremendous growth of enrollment in managed care
enrollment in the late 1980s and 1990s. Of all the states, Arizona engaged in the most
ambitious experimentation due to Reagan’s urging.41
In 1982 Arizona had the unique
distinction of being the last state to create a Medicaid program and the first state to enroll
all of its Medicaid beneficiaries in managed care arrangements.42
Though the program
initially faced difficulties, clients of MCOs were soon receiving care that was of similar
or even greater quality than they had before.43
Reagan’s policies, however, did not result in the enrollment surge in managed
care arrangements in the late 1980s and 1990s. Two developments made managed care
particularly appealing to states. First, the federal government expanded eligibility for
Medicaid beyond the small subset of the “deserving poor” it originally served.44
At the
same time it increased Medicaid benefits.45
States, in other words, faced rising costs due
to growth in Medicaid enrollment and benefits. The situation only became untenable,
however, when a recession in 1990 and 1991 swelled states’ Medicaid rolls and deprived
states of tax revenue.46
States turned to managed care in the hope that it would deliver
40
Harry Nelson, "Reagan Plan Would Hike Health Care Competition," Los Angeles
Times, April 5, 1981.
41
Sparer, 3.
42
National Health Policy Forum, Managed Medicaid: Arizona's AHCCCS Experience,
report, Site Visit Report (Washington, D.C.: National Health Policy Forum, 2000), 1.
43
Sparer, 3.
44
Ibid., 3-4.
45
Ibid., 4.
46
Ibid.

10. 10
quality care at a low price.47
By 1997, almost half of all Medicaid beneficiaries were
enrolled in managed care arrangements.48
Between 1997 and 2005 policymakers on the federal level sought new ways to
ensure that Medicaid beneficiaries received quality care from MCOs. In breaking with
previous regulation of these arrangements, legislators demonstrated their independence,
especially from the heavy hand of the past. These thirteen years saw policymakers
innovate largely unconstrained by the decisions of their predecessors. As explained
above, legislators instituted the 50/50 rule in 1976 and five years later, tweaked it slightly
to make the 75/25 rule. For more than a decade and a half, the 75/25 rule had reigned
supreme. This seemingly small regulatory choice had acquired significance and appeared
to weigh heavily on policymakers’ minds by 1997. Fears about the rise of Medicaid only
MCOs due to the elimination of this rule were bluntly summarized by a policy broker
who said, “I think All-Medicaid HMOs are a terrible thing.”49
This institutional inertia, however, did not prevent the elimination of the rule and
the rise of a new regulatory framework. Congress scrapped the 75/25 rule in 1997 and
replaced it with both a requirement that states develop strategies to assess and improve
the quality of care delivered by managed care arrangements and quality assurance
See also Jennifer M. Gardner, "The 1990-91 Recession: How Bad Was the Labor
Market?," Monthly Labor Review, June 1994, 3.
47
Ibid.
48
Alina Salganicoff and Suzanne F. Delbanco, "Medicaid and Managed Care: Meeting
the Reproductive Health Needs of Low-Income Women," Journal of Public Health
Management and Practice 4, no. 6 (November 1998): 13.
49
Gloria N. Elridge, The Medicaid Evolution: The Political Economy of Medicaid
Federalism, PhD diss., The University of Texas at Austin, 2007 (Austin: University of
Texas at Austin, 2007), 299.

11. 11
standards.50
In doing so, Congress responded to states’ concern that the 75/25 rule made
contracting with MCOs difficult.51
And in 2005 legislators gave states even more tools to
improve the quality of care delivered by MCOs.52
Among other things, states could
expand access to managed care and put beneficiaries in disease management programs.53
Thus it is clear that state actors were decisive in the evolution of the laws
governing the quality of care in managed care arrangements in Medicaid in the four
decades after its inception. This finding is in line with previous scholarship. As James
Fossett and Frank Thompson wrote in 1999, the politics of Medicaid managed care
“tends to be a less visible and more technical kind of politics that plays out in
administrative forums well off the main political stage.”54
In short, when it comes to
managing quality in Medicaid managed care, policymakers hold the stage.
50
Medicaid and CHIP Payment and Access Commission, 18.
In addition, Congress put in place additional safeguards. For more information, see
Elicia J. Hertz, Medicaid Managed Care: An Overview and Key Issues for Congress,
report (Washington, D.C.: Congressional Research Service, 2005).
Also Starr, Remedy and Reaction: The Peculiar American Struggle over Health Care
Reform, 142.
51
Charles A. Bowsher, Medicaid: Spending Pressures Drive States Toward Program
Reinvention (Washington, D.C.: U.S. General Accounting Office, 1996), 3.
52
Medicaid and CHIP Payment and Access Commission, 18.
53
Centers for Medicare and Medicaid Services, Roadmap to Medicaid Reform, report
(Washington, D.C.: Centers for Medicare and Medicaid Services, 2005), 5.
54
Fossett and Thompson, 1170.

12. 12
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13. 13
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14. 14
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