Medicaid is the major national program promoting access to care for low-income populations, but the program also is a federal-state partnership. With costs rising and universal access still a remote objective, many states have turned to market-based strategies involving managed care, with the goals of generating savings for the state, improving access for Medicaid beneficiaries, and sometimes, expanding coverage to those who were previously uninsured. Yet Medicaid is a complex social insurance system that over time has been used to finance a variety of needs, often using cross-subsidies. In addition, states vary in both the scope of their Medicaid programs and the sophistication of the skills and resources they can bring to bear in shaping them. Understanding how these influence the ability to implement market-based strategies in Medicaid and what the effects of these strategies appear to be is of crucial importance because most states now include some features of this approach in their programs.

This article builds on two parallel state efforts to construct health reform for low-income populations using the Medicaid program, with a view to identifying what we can learn about issues related to their implementation and effects. Specifically, the article describes the early experiences of Oregon and Tennessee with health reform based on the Medicaid program under federal Section 1115 waivers. The analysis is drawn largely from in-depth case studies based on document review and site visits to each state in late 1994 to assess their first-year experience, with limited follow-up in August 1996.

In sum, the analysis suggests that Medicaid managed care and market strategies in concept are neither “magic bullets” nor “poison pills” for achieving public policy objectives. The way these strategies are formed, the context in which they are conceived, and the way in which they are implemented can markedly influence their accomplishments. As a public program, Medicaid has features that influence the development of market strategies and their ultimate effects. These include objectives that are broad in scope, multifaceted, and sometimes are not explicitly acknowledged, or that conflict; political processes that influence the speed and form of implementation; and administrative features both external and internal to the program that constrain the flexibility of the design and adoption. These features apply to all states, but they often operate differently in each.

Many of these concerns also exist in Medicaid fee for service. Thus our research suggests that in moving to managed care and market-based solutions, states gain some tools but remain faced with the same challenge: How to achieve more for less and for whom, when support falls short of the amount needed to achieve policy goals.

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