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This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

Fifty states means 50 sets of challenges when it comes to dealing with the high cost of patients who need both Medicare and Medicaid. We're going to hear now about one state's effort to save money. Arizona is allowing private for-profit health insurance companies to care for these expensive patients. They're often elderly or disabled or both. Patient advocates say the private sector can't do a good job managing what has traditionally been a government duty.

But as we hear from reporter Sarah Varney, Arizona has been using private companies successfully for years.

SARAH VARNEY, BYLINE: In Apache Junction, east of Phoenix, a sparsely filled nursing home stands as a stunning achievement for Arizona's public health insurance program. Only half of the rooms are filled and the men and women who live here - too disabled in mind or body to return home - seem surely in their last days.

George Jacobson's is the nursing home administrator.

GEORGE JACOBSON: These are folks that have, you know, chronic cognitive and/or physical disabilities that in most cases are not going to improve.

VARNEY: That sets Arizona apart. Of those Arizonans covered by Medicare and Medicaid and deemed sick, frail or disabled enough to live in a nursing home, only 27 percent of them do. The rest - nearly three out of four - live in assisted living facilities or at home.

UNIDENTIFIED WOMAN: Hi, Joseph. What would you like me to do today?

JOSEPH FORD: Well...

VARNEY: Joseph Ford sits in his well-worn easy chair in the living room of his suburban Phoenix home. He's 42 years old and disabled from a car accident.

FORD: If you could assist in chopping up some vegetables...

VARNEY: His attendant has just arrived and makes her way into the kitchen to prepare dinner. Later, she'll change the sheets on Ford's hospital bed. It's pushed against the wall in the entryway, where he sleeps every night since Ford can't make it up the stairs.

His house is busy today. The case manager from his health insurance company, Dave Oxford, is here, too.

DAVE OXFORD: Alright, Joseph. So you have not had any recent medication changes. I have listed here that you're on Lyrica at 100 milligrams. Is that still correct?

FORD: Still correct.

OXFORD: OK.

VARNEY: Oxford is a case manager for Mercy Care, a subsidiary of the insurance giant Aetna, which is paid with public dollars from Medicare and Medicaid.

He visits all of his clients in their homes every three months to monitor their conditions and assess their needs. Do they need a new wheelchair, a bar installed in the bathroom, help with groceries?

OXFORD: The care doesn't end at the home visit. If there's a need that arises between the quarterly visits, then we ensure that that's taken care of, which I think is a big part of how we maintain people in their home as opposed to a nursing home.

VARNEY: The health plans that compete for Arizona's combined Medicare-Medicaid patients receive a monthly fee. And with that money they're expected to cover all of a patient's needs. Critics have long argued the incentives for companies to keep the cash and withhold care are too great, the potential profits too tempting. And they point to the scandal-filled 1990s when some HMOs kept costs down by denying treatment.

Today, in Arizona, though, patients like Joseph Ford and advocacy groups say the health plan case managers are less like grim reapers and more like guardian angels. Dave is cool, Joseph tells me. He's in my cell phone.

FORD: I appreciate somebody on the other side not only looking out for my wellbeing, and not just looking at me as a number on a paper. I appreciate that.

VARNEY: Ford is a number on a paper, of course - a big number. Nine million people nationwide are eligible for both Medicare and Medicaid and they cost some $300 billion a year. Arizona, though, unlike other states, has long paid private health plans to manage care for public beneficiaries and that's saved them money. Arizonans in nursing homes cost the state $5,400 a month for custodial care. If kept in their homes, the cost is only 1,400.

But Arizona's fervent belief in the free market - having those private companies run public benefits - doesn't mean it's the Wild West. Insurance executives, hospital and provider groups, and advocates say state regulators are vigilant and quickly rebuke plans that don't meet their strict standards.

Tom Betlach oversees Arizona's Medicaid agency.

TOM BETLACH: There's a number of different metrics that we look at on a very regular basis, that look at access to care. Are the members getting access to care that they need? Making sure there's not any gaps in the system. We're looking at the quality measures to make sure that, you know, they're meeting the standards within the contract.

VARNEY: Arizona's system appears to be working. Arizonans eligible for both Medicaid and Medicare enrolled under one managed care plan were far less likely to be hospitalized or put in nursing homes than those in traditional fee-for-service. They used the emergency department less frequently. And when they did end up in the hospital, they spent far fewer days and were re-admitted less often.

There's widespread consensus that Arizona's model works because it pays higher Medicaid rates than most other states. Even with a recent rate reduction, nearly every physician and hospital here accepts Medicaid patients and health plans reap about a two percent profit.

Still, James Stover, head of the University of Arizona Health Plan in Tucson, cautions other states looking to replicate the Arizona model that the system is fragile, and healthy payment rates are a vital element.

JAMES STOVER: If the rate drops below a certain amount, it will make our job more difficult. There's no doubt in that.

VARNEY: For now though, Stover says health plans continue to see a business opportunity in perfecting Arizona's model - still more wasteful and unnecessary medical care to be stamped out.

(SOUNDBITE OF GUITAR MUSIC)

VARNEY: It's a day for celebration at the South Tucson home of Luz Cepada. Her husband picks at his guitar, marking 60 days that Mrs. Cepada has stayed out of the hospital. Her case manager, nurse Martha Rodriguez, sits across from her, under a painting of the Virgin Mary. When the two women met, Mrs. Cepada had just been enrolled in a state-funded Medicare-Medicaid program run by the University of Arizona Health Plan.

Rodriguez was first dispatched to Mrs. Cepada's hospital room to figure out why the 59-year old with congestive heart failure kept ending up in the ER - 10 hospitalizations in one year alone.

MARTHA RODRIQUEZ: I was looking to see, you know, who was at home, who was helping her.

VARNEY: Nurse Rodriquez went to her medical director with a list of services she believed would stabilize Cepada and spare her the trauma of so many hospital trips. Cepada says she was relieved to have Rodriguez's help.

LUZ CEPADA: I trust her because they've been really working close with me. They constantly calling me - how are you feeling - you know, they really care for their patients.

VARNEY: This is the kind of in-the-home attention advocates say disabled and elderly people need to live their lives and health economists say are crucial to controlling spending. Cepada doesn't think much about that. The nurses give her simple comfort. They're right there with me, she says. They're always with me.

For NPR News, I'm Sarah Varney.

BLOCK: That report comes from a partnership between NPR and Kaiser Health News.

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