Selective contracting in California: experience in the second year.

Now entering its third year of implementation, selective contracting for health services in California continues to benefit the Medicaid program and is taking hold in the private sector. The number of hospitals under contract with Medicaid has increased to 274, and the state budget for inpatient services in FY 1984-1985 is projected to increase by only 1%. Operational preferred provider organizations (PPOs) in the state now approximate 50. Hospitals are contracting with private payers at prices averaging 10%-20%, and as high as 40%, below customary charges. PPO premiums are stated to be 10%-20% below indemnity rates. No measurable diminution of quality or access for Medicaid patients has yet been demonstrated. Selective contracting and its attendant competitive incentives have changed provider behavior and continue to dominate state health policy.