Costs drive Medicaid's reality


The Medicaid program currently covers 60 million people, but it's about explode in terms of cost and enrollment

In the next 12 months, Medicaid enrollment and costs will be on the verge of exploding. From 2005 to 2011, enrollment grew by 10 million, but an additional 16 million to 22 million are expected to sign up as health reform goes into effect. The program today covers 60 million Americans, and federal and state authorities share the burden of providing more than $400 billion in annual funding.

As the provisions of the Patient Protection and Affordable Care Act (PPACA) edge closer to reality, the Medicaid program faces unprecedented change, with day-to-day challenges as well as longer term issues such as access, outcomes and payment mechanisms.

Medicaid is “the number one issue every year for states,” says Jim Hardy, who leads Medicaid advisory services in Deloitte’s state healthcare practice. “There’s not a state where Medicaid doesn’t consume more than 20% of the state budget.”

Spending in the last fiscal year grew by only 2%, according to the Kaiser Family Foundation. That’s one of the lowest rates on record and a vast improvement on the 10% increase during 2011. Even so, most states are struggling to balance their budgets alongside weak tax receipts and ever higher Medicaid demands.

Even without PPACA expansion of Medicaid populations, the increase in numbers of low-income Americans has caused an uptick in enrollment. Partisan wrangling, the potential cost of expansion, and the uncertainty of future federal outlays for Medicaid are the main reasons many states remain reluctant to increase access to the program.

Georgia Governor Nathan Deal recently said he doesn’t believe the federal government will come through on funding if his state expands the program.
It’s difficult to characterize Medicaid, but four broad issues will clearly influence its future: expansion and its costs; access; health outcomes; and the dual-eligible population.


A lack of trust in the federal government among states has fueled some of the resistance to opening up Medicaid rolls, says Matt Salo, executive director at the National Association of Medicaid Directors (NAMD). The Supreme Court ruling that allowed each state to decide independently whether to allow all populations up to 133% of federal poverty level to enroll has added complexity to the administration and funding of the program.

PPACA regulations ensure that the federal government will fund 100% of the cost of the newly eligible populations for two years before dropping gradually to 90% by 2020. It sounds like a good deal for states, however, Salo says many are leery.

“The states don’t know what Congress will do this month, six months or 12 months down the road to change the policy,” he says.

Managed care organizations and providers have developed robust forecasting and care models for Medicaid’s current population-generally moms, kids and the elderly-but the infusion of childless adults into the program will force a recalculation, says Clifford E. Barnes, a partner at EpsteinBeckerGreen who specializes in healthcare.

“There’s a lot of reticence among states to expand because of cost,” says Barnes.

For example, he says, AIDS and other diseases cost a great deal of money to treat, and such patients frequently end up in Medicaid.

Hudson Health Plan, a Medicaid HMO, covers six counties to the north and west of New York City. Georganne Chapin, president and CEO, says the cost of care is rising. She has seen a consolidation of providers in the market, with multi-specialty group practices buying smaller practices. The super groups then have a market advantage in rate negotiations. According to Chapin, they “have an insidious influence on the practice of medicine and the cost of medicine.”

Rhode Island legislators have decided to expand the Medicaid rolls in their state, and Neighborhood Health Plan of Rhode Island is preparing for an onslaught of new needs, says Beth Ann Marootian, director of business development. Neighborhood is a nonprofit HMO that serves 50% of all Rhode Island Medicaid beneficiaries.

For example, the plan expects a greater need for behavioral health and substance-abuse programs-the expansion encompasses former prisoners and the homeless.

“We don’t have the luxury of time,  waiting on federal rules clarifications,” Marootian says. “We have to move along and have systems in place. We can’t wait for the rules to come.”

And there are additional costs associated with administration of the program as the eligible population grows. One of the core functions of the insurance exchanges is the facilitation of enrollment for Medicaid members.

Hudson Health Plan, with 120,000 members, has been an innovator in electronic enrollment and paperless transmission of Medicaid eligibility documentation, says Chapin. The state exchanges still need to build such enrollment capabilities and there might be a disconnect.

“Exchanges are supposed to solve this, but there’s still no infrastructure,” Chapin says.

Even with the expertise of managed Medicaid, costs remain the top concern.

Thomas Johnson, president and CEO of Medicaid Health Plans of America (MHPA), says a premium tax set to begin in 2014 concerns his constituents, Medicaid managed care plans. Ultimately, any tax levy on MCOs will be passed along to federal and state payers, Johnson says.

The fee, part of the financing mechanism for PPACA, is expected to raise $8 billion initially, growing to $14.3 billion by 2018. From that point, the tax would be indexed to the rate of premium growth.


Nearly one-third of physicians don’t accept Medicaid coverage, and the influx of an expected 16 million or more into the program will only exacerbate today’s existing access issues, says Gerard Wedig, associate professor of business administration, Simon School of Business at the University of Rochester. PPACA calls for a two-year increase in fees paid to primary care physicians that accept Medicaid, but that will provide only a temporary fix, Wedig says. What’s more, their pay will only increase to rates that Medicare pays.

“States that have problems with Medicaid expenses are tempted to reduce their Medicaid payments to doctors even further, which will aggravate the problem of access,” he says.

Furthermore, Medicaid users are often transient and have little medical access, often because of an inadequate number of physicians practicing in the area who are willing to accept Medicaid. Wedig believes the lack of primary care doctors will put further strain on hospital emergency departments as more people gain coverage.

“It is a surprise to many people the amount of poverty in many rural areas,” says Timothy McBride, a professor at Washington University in St. Louis and former associate dean for public health at the university’s Brown School. “People in rural areas generally have higher poverty, lower education, worse jobs and higher uninsurance rates, so they rely more on Medicaid for help.”

McBride is a member of the Rural Policy Research Institute (RUPRI) Health Panel that provides expert advice on rural health issues to Congress and other policymakers. The CHIP program helped reduce the rate of uninsured in rural areas, he says.

As membership increases, a new enrollment mechanism will be needed to maintain coverage-and therefore access-for the population. Currently, most states require long re-enrollment processes that can deter the eligible from renewing. The lack of continuous eligibility means that patients with ongoing health needs can fall through the cracks.

“There are bright-line rules for eligibility, which means that people $1 over the income requirement will be turned away and either forced to obtain insurance through an exchange or be subject to a financial penalty,” Chapin says.

The members of the Association for Community Affiliated Plans (ACAP), which represents 58 not-for-profit, safety-net health plans, hope to see changes that help reduce churning in Medicaid.

“People fall off the rolls and come back sicker, which means more cost for Medicaid,” says Margaret Murray, ACAP CEO.

In 2014, all states will be required to have a Medicaid renewal period that is no shorter than 12 months, a guideline that many states already follow.


Those eligible for Medicare and Medicaid account for a disproportionate amount of spending in both programs. CMS hopes to create policies to better manage the population.

The CMS Innovation Center is leading a 15-state pilot program designed to develop new ways to meet the needs of the dual-eligible population. More than 20% of the nation’s 9 million dual eligibles, who generally have complex conditions that require costly care, will be covered by the pilot.

Stated goals of the program include an increase in care quality while reducing duplication of services and costs. The 15 states will receive as much as $1 million each to explore new care avenues for the population. Johnson, from Medicaid Health Plans of America, says managed care plans are looking to participate in dual trials.

Neighborhood Health Plan is taking a care management approach for its dual-eligible population, pushing care out into the community whenever possible, says Marootian.

“This is a fantastic opportunity to look at the needs of [dual-eligibles] and keep them out of nursing homes,” Marootian says. “Their numbers aren’t large, but the money required to care for them is great.”

The plan prioritizes the power of medical homes, where patients can find additional support at the point of care. It also includes peer navigators, effective communication among providers, leveraging technology to help manage conditions and working with nursing homes to provide alternative models, such as respite care.


Even without eligibility expansion, managing the program as it exists today will be challenging enough. The focus on improving outcomes for a low-income population while also lowering costs is a noble aim. However, unless the fee-for-service environment that rewards inefficiency is fundamentally changed, any reform effort is doomed to fail, says Salo from NAMD.

The new emphasis on outcomes and the links between long-term physical and mental health will place increasing pressure on MCOs to perform, says Hardy from Deloitte. Likewise, the link between long-term and post-acute care services must be integrated to improve outcomes.

“It’s a question of how to draw these systems to work together,” says Hardy. “These challenges will require Medicaid MCOs to understand these systems better because they’re at risk for those services.”

Many MCOs will look to provider partners to offer services to new enrollees, sharing the risk and the reward, says Thomas Morales, manager in the healthcare advisory practice at Ernst & Young.

“Clearly, states are looking for innovative ways to engage populations that spend the most money,” says Morales.

More patient engagement translates to higher quality outcomes, but it also must encompass value-based purchasing models. Data analytics must measure provider performance, efficiency and customer service.

Some ACAP members have adopted innovative cost-saving approaches such as electronic referrals, where a primary care physician consults with a specialist and delivers treatment rather than referring the patient, for example.

“In this system, the specialist does the triage to determine whether the PCP can handle the issue or whether the patient needs to be seen by the specialist,” Murray says.
Morales says states are looking to Medicaid managed care to be part of the solution.

The trend toward managed care Medicaid contracts is fueling consolidation in the industry as commercial insurers buy their way into the market or make acquisitions to increase their market share. Consolidation is a long-term trend that could change the way Medicaid dollars are distributed and how patients receive care.

The challenges of Medicaid expansion, exchanges, access, outcomes and dual-eligibles are tightly intertwined and unlikely to be solved any time soon. But neither are the continuing financial woes at the federal and state level, a shortage of primary care physicians or trying to figure out how various providers come together to administer care in a quality and cost-efficient way. 

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