For years, federal and state funded health insurance (Medicaid) has grown exponentially and was projected to consume more than 60% of the state budget (FL) if the costs were not controlled.  New legislation was passed and various state supported organizations attempted to make radical changes and reduce costs.  It was widely accepted that the major reason for the increasing costs was Fraudulent practices by agencies across the state of Florida.  However, the government regulation agencies claimed it was not possible to "police" the fraudulent companies or much less those individuals who were scamming the system for the "free benefits".  Amazingly, a decision was made to not award any more Medicaid contracts to providers.  So the logic appeared that by limiting any new providers, this would also limit the "potential" for fraud.  What does not make sense is by ceasing on-going competition, the pool of providers was going to be the same!  Thus the potential for fraud would remain the same or increase. 

Then the state legislature did something unheard of in governmental regulation, they allowed for private Health Maintenance Organizations (HMOs) to submit proposals for managing the care the of those individuals enrolled in the Medicaid program.  Several different private, FOR PROFIT, HMOs were awarded these contracts.  The level of care was expected to deteriorate for the members and providers all over the state were up in arms.  WHY?  Because this meant that on a day to day basis each HMO would be monitoring the services delivered to its members.  The private companies "HAVE" to have a great oversight system because if they do not, they lose money!  When Medicaid providers were monitored by state regulators, it did not matter if money was lost, because the government would simply ask for more.  What blows my mind is that many of the providers still do not like the HMOs managing the care because they are only focusing on how it effects their "bottom line" directly.  This is what Thomas Sowell refers to as "...not thinking past Stage 1..." in his book Applied Economics.  In other words, stage one is only what people view as the initial direct causal relationship between A and B.  In the instance of Medicaid, the HMOs are saving taxpayer's money and are reducing the risk of taxes being increased to cover the rising cost Medicaid benefits and provider the opportunity for better care for their members. 

Ok...with all that background out of the way, we can move on to the title of this blog and how it relates to passive income.  Now that various HMOs have been awarded state contracts to manage the health care of Medicaid recipients, many of them have made a marvelous decision.  The decision is that they recognize that since no more Medicaid contracts are being awarded to Practitioners (i.e., doctors, counselors, etc.), this limits the pool of potential providers for those that they insure.  This means that if one of their members does not like one of the providers in the network, they have very limited alternatives.  In the realm of private insurance, providers are abundant and members rarely have a problem choosing suitable alternatives.  However, the HMOs with state contracts were smart, they started awarding their own contracts to private or group "for profit" providers with the understanding that they would be paid different (lower) rates than practitioners with Medicaid contracts.  Why?  Because they recognize that the only way to make money is to keep their customers (i.e., members) happy and one way to do that is to offer choices.  For some reason, the Medicaid regulators never did this.  The amazing thing about this is that both the members and providers can benefit from this partnership.  This allows freedom of choice for the member and reduces the bureaucracy for the providers, which allows them to focus on the most important thing, the care of the patient.  By opening the door for competition, all parties benefit:  the member, because they have more choices; the provider, because they have less bureaucracy; the HMO, because they increase profits; and lastly, the taxpayer, because costs are controlled.

So how does this apply to passive income and personal growth?  Simple...in theory.  Practitioners who have a desire to provide services for Medicaid recipients, but have been prohibited to do so in the past now have a chance.  I emphasize the word chance, because nothing is a sure thing.  If awarded a contract to provide services for Medicaid recipients by one of the private HMOs, you get to keep 100% of the revenue generated by your services (minus overhead of course).  Once you have established yourself in the community with a good reputation, you will begin to receive more referrals than you can serve.  The next step is to contract with another practitioner to provider services to your "overflow" of clients.  You agree to keep a percentage of the revenue generated by the contractor.  Think of it as a service fee because you are providing him/her with the clients so they do not have to generate their own referrals.  This is important because no referrals = no income.  Therefore, by providing an established and quality product (i.e., services) over time, you can reap the benefits of passive income by passing off clients that you do not have the time or desire to serve.  The ultimate goal is to be able to have multiple contractors generating enough revenue that you could live off of the passive income.  I have personally seen this model work and the owner gained wealth by taking a percentage of the cumulative income generated by all of the providers. 

I can't help but wonder if the private, for profit HMOs who have been awarded state Medicaid contracts are increasing competition in order to weed out the sub par providers and spurring all others to "step up their game" in order to "remain in the game" altogether.  Only time will tell and I am looking forward to it!!

~Brad