W hen Arkansas altered its Medicaid drug policy in July, it was to cut the high cost of purchasing prescription drugs from chain drugstores, without driving smaller pharmacies out of business. Not mentioned was the fact that the data backing this decision, and many others affecting the state's Medicaid policy, came from a data warehouse.

Arkansas is one of only a handful of states that have begun using this technology, which is capable of providing answers to complex problems in a time frame that government officials could only dream about a few years ago. The state is at the forefront of a growing number of state Medicaid programs using various technologies to hold down health costs while improving the quality of care.

States have implemented a wide range of so-called "decision-support systems" that can massage statistical, quantitative and financial information to support policy changes, alter reimbursements and track down fraud and abuse. But no technology shows greater promise than data warehousing.

"I absolutely cannot envision how it worked before," said Janet Olszewski, director of quality improvement for the state of Michigan's Department of Community Health, referring to the data warehouse the department has been using since 1994.

Behind the rise in Medicaid data warehouses is a wholesale change in how the nation's health-care program for the needy is run. In the past several years, states have gone from the relatively simple task of managing payment claims to the more complex chore of purchasing health benefits. Suddenly, health issues, such as patient access, use, cost, quality and outcome, have become terribly important.

"States have become more aggressive and sophisticated in purchasing health care," said Vern Smith, a Medicaid consultant for Health Management Associates. "In order to do that well, they need the most current information possible." The solution for more states is to build a data warehouse.

New Dynamics with Managed Care

In 1993, 33.4 million Americans were enrolled in Medicaid, with less than 15 percent participating in managed-care programs, according to the Health Care Financing Administration (HCFA). The rest were treated under the traditional fee-for-service coverage. Acute-care services, primarily emergency-room visits, made up more than half the $126 billion Medicaid spent on care.

By 1998, fewer than 31 million people were enrolled, but expenditures had ballooned to nearly $153 billion. At the same time, states moved nearly 54 percent of the Medicaid population into managed care. Several factors are behind the change. Federal rules have expanded eligibility to new groups of people, many of whom do not qualify for cash assistance under welfare. For example, more children and pregnant women are eligible than ever.

In return, states have been granted greater flexibility in setting their own financial-eligibility requirements, benefit packages and payment policies. "States used to manage the program but didn't worry about it because the feds wrote the checks," said Jack Ginsburg, vice president for Bull Worldwide Information Systems' Public Sector Unit. "But with block grants, states have taken a much more aggressive role in how to manage the program."

To put it simply, states see the ever-rising costs of Medicaid as the No. 1 issue and managed care as the best solution for reducing those costs. But shifting patients into managed care isn't as easy as it sounds. States used to pay a fee for each individual service. Under managed care, states pay for

a beneficiary's services through capitation fees, which have changed

the dynamics of reimbursement for providers and state Medicaid programs, resulting in new tensions and greater scrutiny.

Under managed care, the state pays a fixed monthly fee for each member -- the capitation fee -- to health-care providers for providing comprehensive services. This has tempted some providers to under-serve their patients to increase revenues, according to HCFA. Providers also have less incentive to provide states with accurate and

Tod Newcombe  |  Features Editor