Most states joined Medicaid in the late 1960s after Congress created it in 1965 (during the Johnson Administration). Arizona didn’t. In fact, Arizona was the last state to implement Medicaid… waiting until 1982 to launch what we now call AHCCCS (the Arizona Health Care Cost Containment System).
That delay made a big difference in how AHCCCS’ business model was built because between 1966 and 1980 the Medicaid world had already started to change from a fee for service model to managed care.
Back in the 60s and 70s most states ran Medicaid used a fee-for-service model. That means the state Medicaid agencies paid doctors, hospitals, and other providers directly for services they delivered. The more services provided, the more payments.
By the late 1970s and early 1980s, states saw that costs were rising fast, and it was hard to control spending in a system that paid for volume instead of outcomes.
When AHCCCS launched in 1982 (under Governor Bruce Babbitt) it didn’t use the old fee-for-service model. Instead, it built the program around managed care from day one.
The early leadership helped set that direction. The first AHCCCS director was Dr. Don Schaller, followed by Dr. Leonard Kirschner who many of you know is still engaged in public health and healthcare and is an active AZPHA member. Note: Between 1982-1983 AHCCCS was part of ADHS and so the AHCCCS director was a Deputy to the ADHS Director (James Smith).
Here’s how the AHCCCS model works in plain terms:
- AHCCCS doesn’t usually pay providers directly for services (except for Native Americans who opt in to the American Indian Health Program)
- Instead, they contract with health plans (called Managed Care Organizations, or MCOs)
- AHCCCS pays those plans a fixed amount per member per month depending on the patient population needs (often called a “capitated rate”)
- The health plans then take responsibility for arranging and paying for care their members need
- AHCCCS’ main job becomes contract management rather than claims payment… basically making sure their contracted MCOs actually provide the required services to their assigned members
AHCCCS hires actuaries who use data and math to set rates that are supposed to cover the expected cost of care for each group of members. Those rates are different depending on who the member is.
For example (these are simple estimates just to illustrate the concept—not actual AHCCCS rates):
- A relatively healthy kid might have a rate of about $150–$300 per member per month
- A person with a serious mental illness (SMI) might be in the range of $1,500–$3,000 per month
- A person with an intellectual or developmental disability receiving long-term services and supports could be $3,000–$6,000+ per month
The reason for the difference is simple. Some populations need far more services than others. The payment system adjusts so health plans are paid more to care for members with higher needs.
This is a key feature of managed care. The state doesn’t pay one flat rate for everyone, it’s providing risk-adjusted payment rates based on expected cost per person per month.
Instead of the state paying every bill as it comes in, the health plans are responsible for managing care within the fixed payment they get for each type of member.
Because of that structure, one of AHCCCS’ important job is oversight and contract management. The agency has to make sure its contracted health plans actually deliver what they’re supposed to and what AHCCCS is paying them to do like:
- Cover required services
- Maintain enough providers in their networks
- Pay claims appropriately
- Meet quality standards
In other words, AHCCCS isn’t just a payer, it’s a manager of contractors. Remember, the plans get a set payment for each member every month.
If they don’t provide care they’re supposed to cover or make services hard to access by having a weak provider network, they can keep more of that monthly payment.
That can increase profits, build reserves, or support higher administrative costs or salaries. But when that happens, the people who pay the price are the members, and the public that funded the program. That’s why it’s so important for AHCCCS to hold their contractors accountable.
Other states eventually tried to move from fee-for-service into managed care, but that transition was hard. Providers often resisted the change, because fee-for-service allowed more billing flexibility and higher revenue. Shifting to managed care meant new rules, tighter controls, and more oversight.
Some states never fully made the switch. As a result, they often spend more per Medicaid member than states like Arizona that rely heavily on managed care.
Arizona avoided that fight entirely by building AHCCCS around managed care from the beginning. There was no transition, just a clean start under a managed care model.
In Part 2 through 4 of AHCCCS 101, we’ll walk through the tools that let states like Arizona design programs like this in the first place. Things like Section 1115 waivers, State Plan Amendments, and how federal approval through CMS actually works.
In later parts we’ll explore AHCCCS’ Complete Care program contractors are, what ACOMs (AHCCCS Medical Policy Manuals) are, and how AHCCCS tries to hold their health plans accountable via audits, network standards, quality measures like HEDIS (Healthcare Effectiveness Data and Information Set), and grievance and appeal processes.
