The new year is well underway now, and the Medicaid program is embarking on an expansion that should bring it to the forefront of many hospital and health systems’ planning agendas.
With 26 states joining the expansion, and CMS issuing new regulations to streamline eligibility and enrollment in all states, there are compelling reasons for providers to take a fresh look at their Medicaid strategy now.
New Medicaid Enrollment Brisk Since October Expansion Kick-off
Medicaid is the most important federal-state partnership. While public attention has been focused on enrollment in the new exchanges where more than 2.2 million Americans have enrolled, a far greater number, approximately 3.9 million people, qualified for Medicaid in October and November alone. Enrollment in states participating in expansion grew 15.5% in October, and as many as 19.5 million additional individuals may establish eligibility for Medicaid by 2020 depending on how many states eventually elect to join the expansion. [1]
For hospitals, however, Medicaid expansion may be a mixed blessing. On one hand, previously uninsured and unreimbursed patients now have some reimbursement. For many hospital patients, having Medicaid coverage on January 1st has been a “huge relief.” On the other hand, in most markets, Medicaid reimbursement contributes little to fixed costs, and in many cases, does not cover variable costs. In cases where expanding Medicaid utilization displaces commercial utilization, hospitals could be worse off. In virtually all cases, hospitals face the prospect of increasing Medicaid utilization paired with a diminished ability to support Medicaid losses due to declining commercial profitability. As a result, having an understanding of the impact of Medicaid on both their mission and margin should be a high priority for hospital and health system executives and trustees across the nation.
Medicaid Market Segments are Complex and Physician Availability can be Problematic
The Medicaid market is complex. The aged and disabled account for a disproportionate share of Medicaid expenditures: 42% of the costs, but only 25% of the enrollees. Many of the aged are dual eligibles who qualify for benefits under both the Medicare program, which pays for their healthcare, and Medicaid, which pays for long-term care and behavioral treatment. Their treatment has generally been provided in uncoordinated care systems, resulting in poor quality and costly care. In contrast, mothers and children account for the largest group of beneficiaries: approximately 50% of the enrollees are children who account for only 20% of the costs.
In addition to adding millions of new beneficiaries in the states opting for expansion, the new Medicaid eligibility rules in effect in all states will result in significant demographic changes, making the enrollment profile more reflective of the general population.
The average new Medicaid enrollee will be:
About 36 years old, compared with 39 years old for current enrollees
Approximately 59% will be non-Hispanic, compared to 50% of current Medicaid enrollees
Split 50%-50% between male and female, compared with 67% female and 33% male in the current population
The new Medicaid beneficiaries will be younger and somewhat healthier, more likely to smoke and drink, but less likely to be obese or have diabetes. Among the new beneficiaries are many people who would consider themselves middle class. These new members may perhaps soften the connotation of Medicaid as a program only for the poor.
Physician availability to treat the new enrollees, however, will continue to be an issue. According to a recent survey, 30% of office based physicians do not accept new Medicaid patients, and the rate of non-acceptance is much higher in specialties such as orthopedics (40%), general internal medicine (44%), dermatology (45%), and psychiatry (56%). Physicians practicing in higher income areas are also less likely to accept Medicaid patients than those in more economically diverse communities, all of which will provide challenges to expansion of care.[2]
Some established Medicaid Managed Care Organizations (MMCOs) have voiced the concern that while they currently have an adequate complement of providers, a rapid increase of the Medicaid patients in their state could have the perverse effect of causing physicians to drop out of the program and actually increase the rate of non-acceptance of Medicaid beneficiaries. This, in turn, would cause more Medicaid beneficiaries to go to the emergency room for treatment or forgo care entirely.
Providers with a strong mission to serve the poor are no doubt familiar with these challenges. They recognize that while putting the patients’ interest first is a core professional tenet, physicians may have understandable reasons for not accepting Medicaid patients. These can range from low payment rates, to time consuming administrative billing complexities, the instability of Medicaid patients who may move frequently and go in and out of enrollment, as well as complicated behavioral health challenges. For the time being, however, the ACA has increased PCP reimbursement for Medicaid patients to Medicare levels although these increases may run out at the end of 2014.
Market Transition is Well Underway
State politics will decide the eventual extent of Medicaid expansion, but the transition of Medicaid from fee-for-service to value-based, risk-sharing contracts is ahead of the curve. Medicaid was an early adapter of managed care and large-scale state programs have been around since the 1990s. Approximately 74% of beneficiaries are now enrolled in some type of a Medicaid managed care plan, as opposed to about 28% of the Medicare market.[3] At least 48 of the 50 states are pursuing aggressive efforts to expand managed care to include new populations as well as initiating new programs to improve quality, care coordination, and control costs.
Even states that are not participating in the ACA expansion may see an increase in their Medicaid enrollment since new income eligibility and enrollment procedures in all 50 states will make it easier to enroll and stay enrolled in the program. For example, the ACA has expanded CMS’ presumptive eligibility policy that allows “qualified entities,” such as hospitals, federally qualified health centers, and schools, to screen pregnant mothers and children for eligibility and temporarily enroll them both in Medicaid or the Children’s Health Insurance Program (CHIP), which provides federal matching funds to states to provide coverage to nearly 8 million children in families with incomes too high to qualify for Medicaid, but who can’t afford health insurance.
TennCare Experience: Scale is Requirement for Market Entry
In December 2013, the TennCare Medicaid program in Tennessee gave new three-year full-risk contracts covering Tennessee’s 1.2 million Medicaid beneficiaries to three existing Medicaid providers already under contract with the state: AmeriGroup, BlueCare of Tennessee, and UnitedHealthcare, reducing the number of Medicaid providers from six despite the fact that several well-financed national players such as Molina Healthcare and Centene invested heavily in attempting to enter the market.
The Affordable Care Act has updated Medicaid regulations and in July 2013 expanded the presumptive eligibility policy to include adults, which could be an important new tool for large, urban teaching institutions and public hospitals. Under the new regulations, hospitals which are Medicaid providers now have the option to make presumptive eligibility decisions to provide patients with immediate access to care regardless of whether a state has otherwise adopted the policy, but must agree to adhere to current state requirements on income eligibility.[4]
Medicaid Managed Care Initiatives Dominate Market
Enrollment of Medicaid beneficiaries in capitated, full-risk managed care plans will be the dominant business model for Medicaid expansion. Most states require contracting MMCOs to have either state-wide or regional networks and the ability to administer an integrated benefits package of physical, behavioral, and long-term care services. Consequently, the necessity for state-wide or regional scale in provider networks and operations will be a barrier to market entry for providers who are not already licensed MMCOs.
While the national market remains fragmented with the top four companies accounting for approximately one quarter of enrollment, most states concentrate their contracts with a handful of large well-financed MMCOs, which may also serve to limit the opportunity for new market entrants.
While MMCOs are typically paid monthly capitated full-risk payments by the state, they in turn may contract on a fee-for-case service or per case basis with their network providers.
Given the potentially negative impact of fee-for-service Medicaid, hospitals and health systems will need to calibrate their strategy for selective participation in Medicaid managed care risk if they are to remain whole as eligibility expands.
For example, Optima Family Care, a 167,000 member state-wide MMCO plan in Virginia that is a division of the Optima Health plan, owned by Sentara Healthcare, contracts with the state on a full-risk basis, but pays all of its network providers on a fee-for-service basis against a uniform fee schedule set by the state, although this may change as ACOs grow in effectiveness.
Presbyterian Healthcare Services in Albuquerque, however, which has a state-wide Medicaid enrollment of 200,000, does pass risk onto their own physician group and with other provider networks, will consider shared savings contracts depending on their care management capabilities.
Medicaid Managed Care Enrollment
According to most recent CMS data, 42 million out of a total of 57 million Medicaid enrollees nationally as of that date were already enrolled in some type of managed care program before the ACA expansion.[5] This is nearly twice as many beneficiaries enrolled in managed care than were in 2002. As of that date, the Medicaid managed care market included some 693 different Medicaid Managed Care entities including:
157 commercial managed care plans (Medicare Advantage, Medicaid, and Commercial) with 12 million Medicaid beneficiaries
175 Medicaid-only managed care plans with 16 million beneficiaries
163 prepaid inpatient health plans with 9 million enrollees
40 primary care case management plans with 8 million enrollees
63 prepaid ambulatory care health plans with 12 million beneficiaries
79 programs of all-inclusive care for the elderly (PACE) with 22,700 dual eligible beneficiaries
Generally, states offer Medicaid beneficiaries the choice between two different plans if they are to be enrolled in managed care. Almost all states carve out at least one or more acute care benefits from their contracts (for example, behavioral health services) and provide that service to MMCO enrollees on a fee-for-service basis or under a separate managed care risk contract. Most states set actuarially determined managed care rates administratively, but others use a negotiated or competitive bidding process with risk adjustment based on age, sex, eligibility, health status, or location.[6]
With the launching of the CMS dual eligible demonstration in 2013, large commercial Medicaid plans are starting to tap into the $320 billion dual eligible market—still mainly fee-for-service. The dual eligible market may offer substantial opportunities for shared savings for well-organized MMCOs, although not without risk given the complex nature of the beneficiaries.[7]
Specialization and Good Care Management Key to Success
Because the needs of Medicaid patients are complex, the most successful Medicaid managed care organizations are specialized with care management programs tailored to their enrollees: pregnant mothers and children require different care models than dual eligibles. The newly eligible adult population who are enrolled through expansion will require a different care model than dual eligibles.
Many successful plans have a separate organizational structure to supervise the care management protocols for Medicaid patients, but use common back office functions for claims processing and the like. MMCOs with dominant Medicaid enrollment (>75%) have been more profitable than plans with mixed business portfolios, which also includes Medicare Advantage, or commercial products. Both Presbyterian and Optima’s Medicaid plans, however, are owned by full-service HMOs and report that their Medicaid plans have been consistently profitable over the past two decades, with some years the Medicaid plans accounting for a majority of the health plan profits and contributing to the overall health systems’ margins.
Overall, provider sponsored MMCO plans have been successful, frequently out performing for-profit plans with competitive medical loss ratios and lower administrative costs. A national study of a sample of 170 plans with more than 5,000 enrollees published in CMS Medicare & Medicaid Research Review in 2012 indicated operating margins of approximately 2% for provider sponsored plans with dominant Medicaid enrollment, slightly better than operating margins for similarly focused for-profit, publically traded MMCOs.[8]
The study’s authors suggest the better results achieved by Medicaid dominant plans may be the result of more cost–effective care management, restriction of access to less costly providers, and lower rates negotiated with network providers.
Multi-Dimensional Strategy Needed to Manage Medicaid Expansion: Four Major Options Define Choices
Segmenting Medicaid patients by the type of care needed and the most appropriate care setting is generally seen as the most effective means of providing care. As a result, hospital systems will likely need different strategies for different populations, depending on how their markets are segmented and their current exposure and experience with risk products.
Option #1: Continue to Focus On Strengthening Primary Care and Improving Cost Efficiency in Current Medicaid Market. Because Medicaid utilization is a negative contributor at most hospitals, this strategy is only a viable option if pursued in conjunction with some type of managed care contracting defined in Options #2 and Options #4 below.
Option #2: Develop Value-Based, Risk Sharing Contracts with Existing MMCOs. The option of extending value-based risk contracting to the Medicaid market segment may be a feasible option for markets where there are established MMCOs. Almost eight out of ten Medicaid beneficiaries will be enrolled in a managed care plan by 2020. As a result, the over 500 commercial and Medicare Accountable Care Organizations (ACOs) may be well positioned to leverage their clinical networks and care management systems to sub-contract for targeted Medicaid market segments.
Option #3: Partner with Existing MMCOs to Develop New Products for Target Market Segments. The changing demographics of Medicaid make new, younger enrollees more attractive managed care candidates, and the public exchanges will offer products suitable for people who may move in and out of Medicaid eligibility, but will qualify for subsidies to maintain health plan coverage.
Option #4. Own a Plan. Depending on the exposure and Medicaid experience of the provider, this could involve the expansion or acquisition of an existing license or the development of a new one. Providers who are considering accepting greater Medicaid risk will need to have many of the same skills in place that are required for Medicare Advantage. Generally, a base of at least 10,000 patients is necessary to get started although new market entry is difficult given state contracting procedures. In addition to gaining minimum scale, necessary business skills will include:
Physician alignment
Networking and contract management
Appropriate rate setting to avoid adverse selection
Experience in design and implementation of care coordination initiatives
IT infrastructure
Member communication
None of the above options are mutually exclusive, and a large metropolitan or regional system might draw on several approaches in moving forward.
Take a Deliberate Approach before Diving In
Medicaid expansion opportunities under the ACA will vary significantly. As we discussed, providers who are organizing accountable care organizations may have a unique opportunity to leverage their clinically integrated networks (CINs) to contract with established Medicaid plans, or to partner with payers to develop new products for specific Medicaid market segments. Other providers will do better to limit their exposure and focus only on the expansion of Patient Centered Medical Homes which can improve primary care access and curb unnecessary ER utilization and hospital admissions.
Before finalizing a plan to move forward, there are a few key questions to be answered:
Is there consensus on the likely rate of change there will be in your Medicaid enrollment and what impact this change will have on your organization’s finances?
Would Medicaid expansion be a good fit with your mission?
Do you have the necessary physician network, IT, and behavioral and community outreach capabilities to even consider expansion as an option?
Do you have sufficient experience & skills in value-based risk contracting to apply these skills to the Medicaid market?
Is there a sufficient population base to support a managed care initiative of >10,000 enrollees?
Are there any experienced payers in the market who would make good partners?
Under what, if any, circumstances should you develop your own Medicaid risk arrangements versus partnering with others?
Assuming you have reached consensus on moving forward after reviewing these questions, the next step will be a deeper dive with a financial feasibility assessment. Given the complexity of the Medicaid market, and the need for scale in state-wide contracting, securing an experienced managed care partner may turn out to be the best business option for entering the MMCO market.
The authors are grateful to Michael Dudley, CEO of Optima Health, for his assistance in preparing this article.
Profile: Optima Health Medicaid Managed Care Plans
Optima Health is a full-service, state-wide HMO in Virginia owned by Sentara Healthcare headquartered in Norfolk. Optima Health offers two MMCO plans under full-risk, capitated contracts with the Virginia Department of Social Services: The Optima Family Care plan, an early intervention healthcare program for uninsured pregnant women, children, and their families funded through the state’s FAMIS (Family Access to Medical Insurance Security) program, and FAMIS Select, a premium support program for working families with children. The Optima MMCO program now covers approximately 167,000 women, children, and their families on a state-wide basis and was launched 18 years ago as a pilot in the Norfolk market. It is now offered throughout the state of Virginia. Key success factors include:
Large scale
Comprehensive physical, behavioral, and long-term care
State-wide primary care network
Segment specific care models
Specialized Medicaid case managers
Aggressive outreach program to members
In-house data analytics and central data warehouse
Centralized case management
Defined administrative structure and clear chain of command
High customer satisfaction
Partnership relationship with Virginia Department of Social Services
Optima pays its providers on a fee-for-service basis against a uniform rate structure set by the Virginia Department of Social Services. Given the slower development of Accountable Care Organizations in Virginia, they have not signed a risk sharing savings agreement with its provider networks as yet, although this may be considered in the future. Optima’s MMCO plans have been consistently profitable over the past 18 years with margins fluctuating positive or negative depending on the state’s rate setting cycle. In most years, the MCCO plans have made a positive contribution to the Optima Health’s bottom line. [1] In June 2013, six months ahead of major coverage expansion and new enrollment standards as part of the ACA, 55 million individuals were enrolled in Medicaid nationally, nearly ¾ non-disabled and non-elderly. Kaiser Commission on Medicaid and Uninsured, Kaiser Family Foundation, June 2013 Data Snapshot, January 2014 Issues Brief. [2] Casalino, Lawrence, MD, PhD, “Professionalism and Caring for Medicaid Patient…”NEJM, Oct 9, 2013 [3] Medicaid Managed Care Enrollment Report, Summary of Statistics, CMC, July 1, 2011; Kaiser Family Foundation HMO Penetration Rate, July 2011 [4] Health Policy Brief, “Hospital Presumptive Eligibility,” Health Affairs, January 9, 2014 [5] National Summary of Medicaid Managed Care Programs and Enrollment Summary of Statistics, Center for Medicare and Medicaid Services, July 1, 2011. Unduplicated enrollment of 42 million. Bulleted Enrollment break out by type includes 19 million enrolled in more than one type of plan out of total of 61.5 million enrollees. [6] Kaiser Commission on Medicaid and Uninsured, Policy Brief, Kaiser Family Foundation, February 2012 [7] Eggbeer, Bill; Bowers, Krista; and Morris, Dudley, “Dual Eligible Reform a Step Toward Population Health Management,” HFMA Magazine, April 2013. [8] McCue, Mike, “Financial Performance of Health Plans in Medicaid Managed Care,” Medicare & Medicaid Research Review 2012: Volume 2, No. 2. Operating margin ratio is defined as a percentage of operating income earned from an MMCO’s revenue.
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