State Approaches when Confronted with Medicaid Budget Shortfalls
Every state now faces its most daunting budget crisis in memory, as general revenue and tax collections plummet at the same time that Medicaid enrollment grows. This note will highlight actions stakeholders should expect states to take in order to address Medicaid budget shortfalls.
Having lived through recessions as a Medicaid director, and having advised various stakeholders, my goal is to describe what is likely to happen, rather than judge the merits of the options. The simple reality is that states will need to – and will – make very difficult decisions.
Expense-related options
In general, states have four options to reduce state Medicaid expenses: reduce payment rates; reduce the number of people on Medicaid; reduce benefits; and/or change the utilization of services. During the public health emergency, some options a state might pursue are constrained as a condition of accepting enhanced federal matching funds under the Families First Coronavirus Response Act (FFCRA), most notably around eligibility.
1. Reduce payment rates
MCO capitation rates.
In states with managed Medicaid, this is where they are likely to start. Because of the pandemic, overall health care utilization has fallen dramatically, related both to delayed elective procedures, and to the public’s overall reluctance to seek care outside their homes. Milliman estimates that overall utilization in the United States will decrease at least $75 billion in 2020 (across all payers), in spite of increases in services related to Covid-19 itself and increases in other services (such as telehealth).
States not only are likely to reduce the capitation rates paid to managed care organizations (MCOs) to reflect dampened utilization and a slow trajectory back to “normal” (whatever that means), states are likely to make other assumptions that support significant MCO rate cuts, such as assuming substitution of telehealth for clinic services at an overall lower unit cost; that some delayed care will never occur; substitution of less expensive settings/practitioners for more expensive alternatives (private offices instead of hospital-based services; nurse practitioners and physician assistants instead of physicians); etc. Overall, expect states to pull billions out of Medicaid managed care rates.
Provider rates.
In an ordinary recession this is where states start, especially with facility-based providers like hospitals and nursing facilities. With facilities, states don’t have to worry (as much) about providers electing not to participate in Medicaid due to rate cuts. Also, unlike individual practitioners, states don’t have to worry that facility rate cuts will prompt the provider to retire or consider moving to another state. Needless to say, this recession is fundamentally different, because the root cause was a profound health care event. As a result, states might be more reluctant than usual to cut rates to hospitals and nursing facilities, given the stress these providers have experienced serving Covid-19 patients. This is true even though providers have received funds under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. States are likely to be sympathetic to the fact hospitals and nursing facilities cannot weather the deep rate cuts states have imposed in past recessions.
Similarly, other providers have experienced significant economic stress because of the pandemic, as patients have stayed away from provider’s offices and clinics, including physicians, psychologists, dentists, and others.
Having said that, when the state’s budget house is burning down, there will be very few options that don’t get utilized, so providers should expect Medicaid rate cuts. It’s more about the magnitude, and less about the fact it is likely to happen. In states with managed Medicaid, this will compound the MCO rate cuts, as states pull funds out of capitation with mandates that MCOs pass-through prescribed provider-targeted cuts.
And the reason that states typically start with provider cuts will remain true, even now: it is the fastest way for states to realize savings, particularly if CMS doesn’t express reservations that a proposed rate cut will impair access to care, even as more Medicaid beneficiaries enter the Medicaid program.
2. Eligibility-related
One of the common Medicaid budget tools involves reducing a state’s overall number of Medicaid eligibles, either by changing/eliminating optional eligibility categories, or by increasing the frequency of eligibility redeterminations. During the public health emergency, if a state accepts the 6.2% enhanced federal matching funds under FFCRA, it cannot take any action that jeopardizes Medicaid eligibility.
Section 6008(b)(3) of FFCRA requires states to maintain their eligibility standards, methodologies, and procedures as they existed on March 18, 2020, and to guarantee the Medicaid eligibility status of anyone enrolled on March 18, 2020 until “the last day of the month in which the [public] emergency period . . . ends.”
It’s clear the FFCRA’s eligibility maintenance of effort (MOE) generally ties the period of enhanced federal funds with the duration of the eligibility protections, both of which exist throughout the declared public health emergency. What this means, of course, is that once the public emergency is declared to be over (whenever that occurs), states will lose the enhanced funding (at the end of that fiscal quarter, as discussed below), and states no longer will be subject to any eligibility MOE.
The recession is likely to last well beyond the public health emergency, as jobs return slowly, and as state general revenues are slow to recover. Thus, because the state Medicaid budget crisis is likely to extend well beyond the public health emergency, we should expect some states to pursue changes to Medicaid “standards, methodologies, and procedures” when states are able to take these actions. The loss of the 6.2% enhanced federal funds at the end of the public health emergency itself might force states to take drastic actions.
3. Reduce benefits
Optional adult benefits.
States are likely to consider eliminating optional adult Medicaid benefits, such as dental, vision, hearing, and other benefits. In fact, in the middle of May, California’s Governor Newsom already proposed in his budget to eliminate recently-restored adult benefits, including eyeglasses, speech therapy, adult podiatric services, and hearing exams. Several optional benefits are likely to be safe, including prescription medications and many home and community-based services, but many optional adult benefits will be on the table in states’ budgets.
Some individuals believe that guidance CMS released regarding the FFCRA MOE extends beneficiary protections to maintenance of their benefits as those benefits existed on March 18, 2020. This interpretation is based on CMS’s response to a cost-sharing inquiry, in which CMS said that raising cost sharing is impermissible “if it reduces the medical assistance for which a beneficiary is eligible.” In my view, this CMS response does not signal an MOE around benefits – the question was about cost sharing – but others disagree.
Amount, duration, and scope.
Usually, the commentary about benefit changes focuses on the treatment of optional adult benefits. However, states occasionally also look at changes to mandatory benefits, by altering the “amount, duration, and scope” of those benefits. For example, coverage of mandatory inpatient hospital services doesn’t necessarily mean unlimited hospital benefits. For example, hypothetically a state could consider a limit a benefit limit of 20 inpatient days/year/beneficiary.
CMS has great discretion in this area to define what constitutes a permissible limitation in the “amount, duration, and scope” of a benefit. In the past, CMS has imposed two sorts of tests, neither of which are found in any regulation or manual but have been utilized as a kind of longstanding internal subregulatory framework within CMS to review state requests to change the “amount, duration, and scope” of a benefit. The two tests:
Is the state exempting eligibility groups like children (because of EPSDT) and adults with disabilities? CMS typically requires explicit exemption of these groups from any proposed limit.
For the other eligibility groups, would at least 90% of the Medicaid eligibles have all their needs fully met within the limitation? In other words, if the state proposes to limit inpatient hospital days to 20/year, would at least 90% of the non-disabled adult eligibility groups have their needs fully met with 20 days/year?
In past recessions, CMS has been willing to consider limitations in mandatory benefits along these lines. Having said that, this is an area that most states are likely to avoid, both because it simply converts those non-covered services into hospital uncompensated care (in my example), and because providers have been so hard hit by the pandemic, converting covered benefits into non-covered uncompensated services would be a difficult policy to pursue.
4. Utilization-related savings
Substitution-focused
States more actively pursue utilization-related actions in moments of Medicaid budget shortfalls. One form involves substitution-focused changes. Examples include utilizing preferred drug lists to shift utilization toward lower-cost medications; imposing authorization requirements on more expensive settings (e.g. hospitals) when alternative lower-cost sites of care (e.g. ambulatory surgery centers) are available; or denying days awaiting placement in a hospital with an expectation a beneficiary instead is served in a post-acute setting.
Preventive care itself is a strategy that draws on substituting early intervention (prenatal care, health screenings, immunizations, etc.) to reduce more expensive forms of avoidable care. While there is a lag in realizing prevention-related savings, state budget challenges often catalyze strategies like increasing managed care, on the premise of incenting a third-party MCO to drive prevention-focused substitution effects.
In states with managed Medicaid, some of these substitution effects become “efficiency adjustments” that are used to cut MCOs’ capitation rates. For example, a state’s actuary might assume that some emergency room visits should have been primary care or urgent care visits, and the state will cut capitation rates, telling MCOs to “achieve” these efficiencies by changing utilization patterns in the direction of lower cost settings. Whether these efficiencies can be achieved is the subject of robust debates between MCOs and states (and their actuaries); my point here is that we should expect states to lean into this, because of severe budget shortfalls.
Reduction-focused
Utilization strategies also can be reduction-focused – not necessarily seeking to substitute one service for another, but to deny coverage for unnecessary services often associated with fraud, waste, or abuse. In recessions, states often tighten controls in these areas, whether it involves potential upcoding of claims, new authorization requirements and denials, heightened coordination of benefit activities where another payer might be primary, or related actions.
This is another motivator for many states to turn to managed Medicaid; many states believe that MCOs have more expertise and competence with utilization management, and states often build capitation rates in anticipation of those savings (compared to Medicaid fee-for-service), and then incorporate the projected savings into state budgets.
Revenue-related options (that don’t involve raising general tax rates)
States also have a set of options to increase revenue from various sources, including the federal government.
1. Enhanced federal match rate
FFCRA authorized a 6.2% increase in federal match for most Medicaid populations and services, beginning for services on January 1, 2020, and ending on the last day of the calendar quarter in which the public health emergency exists. This federal response includes certain requirements for states, including the MOE mentioned above. Once the public health emergency is declared over, states will seek to maximize the legitimate services they can pull forward and pay (and claim) within that calendar quarter of the enhanced match, and then states will work with CMS to manage the accounting process at the transition back to normal matching rates.
2. Capture maximum federal Medicaid match
When a state confronts a budget crisis, once common tool it uses is to maximize the legitimate claiming of services at the highest possible match rate. Examples include reviewing administrative cost allocation formulas between Medicaid and CHIP (which has a higher matching rate); seeking to leverage 100% federal match for services delivered to Native Americans through contracted providers; and moving toward Medicaid managed care in states with matching rates above 50% (MCOs are paid at the state’s matching rate for medical services, which range from 50-80% federal financing, rather than the state’s normal administrative match rate for most services, which is fixed at 50% in all states).
Perhaps ironically, the pandemic is prompting conversations in some states about whether to expand Medicaid under the Affordable Care Act. The argument being made is that accepting 90% federal financing for the expansion adults – with 10% of the financing coming from states – would reduce the overall state and local burden in the current budget crisis, if the alternative is 100% state and local funds to keep providers open.
3. Provider Taxes/Intergovernmental Transfers
Historically, states have pursued various forms of provider taxes, intergovernmental transfers, and other controversial techniques to maximize federal Medicaid financing by using new sources of state and local funds. For years, these efforts have frustrated federal officials, and various legislative and regulatory actions have been introduced to curb this kind of state behavior.
Still, several options remain permissible, and states often walk right up to the line when they are in economic distress. For example, some are now urging states to increase taxes on Medicaid MCOs (and to build the cost of these taxes into the capitation rates paid to MCOs), to mitigate the impact of cuts to benefits and provider rates.
4. Recoveries
States typically get more aggressive about recoveries and collections when they face severe Medicaid budget shortfalls. This includes more aggressive actions in estate recoveries; third-party liability actions in various medical malpractice and personal injury cases where Medicaid covered the underlying services related to the tortious behavior; and maximizing other forms of coordination of benefits (e.g. private employer worker’s compensation).
5. Other revenue
Apart from increases in state and local taxes – which is difficult to impose on taxpayers in a recession -- there are other revenue sources states pursue when in Medicaid budget-related distress. One example is supplemental pharmacy rebate negotiations that produce higher rebates for preferred drugs.
Sometimes, adding or increasing Medicaid beneficiary premiums is part of this analysis. In general, collecting premiums doesn’t result in much revenue – the main effect premiums have involves reducing enrollment, and individuals drop out or lose eligibility. This option is off the table for the duration of the FFCRA MOE, but it is likely that some states will pursue this option once the public health emergency end.
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As I mentioned at the top, the goal in this note wasn’t to consider the merits of these ideas. Instead, my goal was to catalog the approaches that we are likely to see as states grapple with the worst economic situation in memory, at the same time Medicaid rolls and costs are growing at an incredible rate.
For more information
Early Look at Medicaid Spending and Enrollment Trends Amid Covid-19, Kaiser Family Foundation: https://www.kff.org/medicaid/issue-brief/early-look-at-medicaid-spending-and-enrollment-trends-amid-covid-19/?utm_campaign=KFF-2020-Medicaid&utm_source=hs_email&utm_medium=email&utm_content=88017566&_hsenc=p2ANqtz-9rXZ54wg4YeSKLulsBah4N7Nf3X28I8gK7YkWKNaKX6KpvW_pF5Ag-j5oTC6-cNHGxIWXfsrXJj0O5-lVcq2AzlJDrw046IidGDUOEvuclPCQ57kg&_hsmi=88017566
Estimating the Impact of COVID-19 on Healthcare Costs in 2020, Milliman: https://milliman-cdn.azureedge.net/-/media/milliman/pdfs/articles/estimating-the-financial-impact-covid19.ashx
COVID-19 Impact on Medicaid, the Marketplace, and the Uninsured, Health Management Associates: https://www.healthmanagement.com/wp-content/uploads/HMA-Updated-Estimates-of-COVID-Impact-on-Health-Insurance-Coverage-May-2020.pdf
As Expected, Medicaid Enrollment is Starting to Increase, Joan Alker, Georgetown Center for Children and Families: https://ccf.georgetown.edu/2020/05/14/as-expected-medicaid-enrollment-is-starting-to-increase/
CMS FAQs on FFCRA, including the maintenance of effort requirements related to enhanced federal matching funds, dated May 5, 2020: https://www.medicaid.gov/state-resource-center/downloads/covid-19-faqs.pdf
Taxing Medicaid Managed Care to Mitigate Medicaid Cuts, Andy Schneider, Georgetown Center for Children and Families: https://ccf.georgetown.edu/2020/05/14/taxing-medicaid-managed-care-to-mitigate-medicaid-cuts/