California is the latest -- and of course the largest -- state to join a national effort to improve health care for “dual eligibles,” low-income elderly and disabled people who qualify for both Medicare and Medicaid. That population has historically been left to navigate both programs on their own, but states are increasingly working to help coordinate care for dual eligibles. Last week, California reached an agreement with the Centers for Medicare and Medicaid Services (CMS) on a plan to achieve that goal.

The crux of the state’s strategy is to place those people in managed care programs, in which one company oversees all of a patient’s health-care needs and is paid on a per-person basis, rather than the traditional fee-for-service model that pays per procedure, per test and so on. Any money not spent on patient care is then split between the company, CMS and the state. But the company is also liable for any costs beyond its per-person allotment.

That’s a powerful incentive for companies to keep their clients healthy and make sure they get the best possible care. By placing one entity in charge of an individual, managed care should also help eliminate the fragmentation that frequently exists between Medicare, which covers things like hospital visits and some prescription drugs, and Medicaid, which covers longer nursing home stays and in-home assistance.

California is making its move under the Affordable Care Act (ACA), which authorized CMS to oversee state demonstration projects that aim to improve coordination between Medicare and Medicaid. It is the fifth state to sign a memorandum of understanding with the Obama administration; the first four were Illinois, Massachusetts, Ohio and Washington state.

When developing their demonstration projects, states can theoretically choose between managed care, called the capitated model, or a managed fee-for-service model in which the state handles the integration of Medicare and Medicaid benefits and receives a performance payment from CMS if it meets certain targets. But managed care is winning out -- four of the five approved states proposed managed-care programs; Washington state opted for managed fee-for-service. Of the 21 other states that have proposed a duals demonstration, 14 chose managed care. Five decided to try managed fee-for-service, and two are testing both models.

“We think both models can work well,” says Tim Englehardt, who is overseeing the duals demonstrations at CMS. “But many states believe there is flexibility under a capitated model that’s simply not there under fee-for-service.”

It’s easier, for example, to change how doctors are paid or what benefits are offered in managed care, where the only restriction is a flat per-person payment. Take California: it was the first state to include dental, vision and non-emergency transportation benefits in its demonstration. Those services might have been cost-prohibitive with fee-for-service, but they aren’t in managed care.

Plus, most states already have robust managed-care programs for their younger, non-duals population. In 41 states, at least 50 percent of Medicaid beneficiaries are enrolled in managed care. “That’s how most states run their programs now, so there has been broader momentum on that,” Englehardt says.

California will be the biggest testing ground yet for whether managed care can save money and improve care for dual eligibles. A little more than 450,000 Californians in eight counties will participate in the project. Enrollment will be phased in over 12 months starting in October. At first, eligible people will have to actively opt into the demonstration, then passive enrollment will begin.

Enrollees will be given a single identification card to access all of their benefits in both Medicare and Medicaid. CMS and the state Medicaid office will work jointly to contract with health plans to provide managed care, a process that will begin soon. Fragmentation will still exist -- the company will receive separate checks from Medicare and Medicaid -- but it should be a seamless experience for the patient.

Particular attention will be paid to Los Angeles County, where enrollment in the demonstration was capped at 200,000 people. That will leave 70,000 dual-eligibles who will not enroll in managed care. Jane Ogle, who is overseeing the project for the California Department of Health Care Services, says that will give the state a natural way to gauge how much of a difference the reforms make. The goal is 1 percent in total savings in the first year, increasing to 4 percent by the third. Success will also be measured by patients’ satisfaction with this new coordinated care.

“The real focus of this is the better care and better access,” Ogle says. “Savings are important, but not as important as getting these services integrated. If we do that, no matter what the savings, it's worth it.”

While federal and state officials express excitement about these pending projects, expectations are notably lower than they were when the demonstrations were first announced in July 2011. Though 26 states have applied to participate, only five have been approved so far and most probably won’t begin until 2015. Some health plans reportedly boasted that they could obtain 8 or 10 percent savings on the dual-eligible population, but those estimates have been scaled back to the 1 to 4 percent projections in California.

One state, Tennessee, has actually backed out of the demonstration altogether because state officials didn’t think they could make the economics work. They concluded that not enough health plans would participate under a managed care model because companies were concerned about receiving capped payments.

That’s going to be a key metric to watch in California, says Caroline Pearson, who tracks state health reform at Avalere Health, an independent consulting firm. There are already reports of state officials clashing with health plans over the demonstration’s payment rates. In general, implementation has shown that getting two of the largest government’s bureaucracies to work well together is going to be a little messy.

“There was a lot of excitement about how many people were going to be affected. The project was extraordinarily ambitious and under not very realistic timelines,” Pearson says. “We're kind of coming down to reality now.”

The stakes are high. The nation’s 9 million dual eligibles account for 15 percent of Medicaid’s enrollment, but nearly 40 percent of its spending. As conversations in Washington, D.C., focus on deficit reduction and entitlement reform, health officials know that the duals demonstration could play a significant role in getting government health care spending on a sustainable path.

“[Medicare-Medicaid enrollees are] one of those places we can improve,” Englehardt says. “We genuinely believe that these programs will be better for people, and we genuinely believe we’ll get some savings over time.”