Medicaid in crisis: States have choices, but none are good

In remarks made to executives at the National Association of Psychiatric Hospital Systems (NAPHS) conference in Washington, DC, Matt Salo, executive director of the National Association of Medicaid Directors (NAMD), explained that despite improvement in the economy and state revenues, state Medicaid systems are “in crisis” and will survive only with a combination of significant state program reforms and “ugly” near-term cuts.  

Confronting fiscal crisis

While states struggle with the worst financial situation since the Great Depression, a situation that until recently, put their Medicaid budgets “in free fall since late 2008,” Salo said that “a slight uptick” in state revenues has provided state Medicaid directors their only bit of good news. The uptick will reduce states’ projected FY 2012 Medicaid shortfall from $200 billion to an estimated $175 billion in FY 2013.

But, he pointed out, the good news ends there. “We’ve got a new $175 billion shortfall, the stimulus money—the money that literally kept Medicaid programs alive—is gone, and the appetite for state tax increases is also gone.” The result, he said, was that “the low-hanging fruit, the easy cuts, have already been made and options for doing something really wonderful are few and far between.”

Now, he explained, states are grappling with how to balance their books in the FY 2012-2013 biennium , but there are only two choices—generating savings through improved quality, efficiency, and waste reduction; or cutting their way out. “Everybody loves the first option. It’s so easy to talk about,” said Salo.  But there’s a problem, he warned:  “System reforms alone cannot generate the needed level of savings in such a short time window.”

So, he explained, even as they push out new reforms, state directors will be forced to make cuts. “States know that cutting [Medicaid] doesn’t make things better for very long and ultimately makes things worse. But,” he asked, “What else is there?  What can you do?”

Improving healthcare’s “really crappy ROI”

Reforming, or cutting, any aspect of Medicaid budgets is complicated by the complexity of the system itself, Salo noted.  “The Medicaid system does things that no other system does.  Take the dual eligibles issue, for example.  There are so many layers to serving that population alone—like the difference between an 85 year old living with dementia and a 40-year old living with Down’s Syndrome.  The issues for the two are very different—yet they’re in the same system.”

State directors are figuring out and grappling with the fact that Medicaid is ‘the duct tape’ that holds the healthcare system together, because the rest of system is fundamentally flawed,” he added, noting that although the nation spends 17 percent of GDP on healthcare, “that investment is giving us a really crappy ROI.

“The whole system needs to change. We need to restructure care delivery and payments.   I would argue that FFS, especially for the more complex and fragile populations, doesn’t make sense.  Paying for volume of services, rather than paying for outcomes, doesn’t make sense.  We need to fundamentally reorient the payment system.”

“Hard” and “scary” changes ahead

While every player in healthcare is likely to undergo major changes, Salo asserts that the scope of Medicaid’s budget challenges will force it to confront its problems first:  “Other payers worry about a coming crisis, but Medicaid is already at the crisis point,” he said. To meet its crisis, Medicaid must move from being what Salo called “a mindless payer of bills” to “a driver for improved healthcare.”

Significant Medicaid reform efforts are underway in virtually every state.  Salo said that many states are speeding up their movement toward Medicaid managed care organizations, while others—including Missouri, North Carolina, or Connecticut—are developing ‘in-house’ managed care capabilities, and still others are using some combination of both.

State Medicaid directors “are grappling with the fact that Medicaid is ‘the duct tape’ that holds the healthcare system together,” Salo explained, noting that because so many have a vested interest in the status quo, changes are proving “hard” and “scary.”

Scarier still is the fact that as states drive a variety of reform efforts, they have no choice but to make cuts as well. Salo predicted that some of these cuts “will look ugly, shortsighted, or even spiteful” to hospitals, providers, and consumers.  But, he asked, “What are the alternatives when states need to find $175 billion in revenue?”

He explained that by law, states cannot cut Medicaid eligibility, which extends to some 60 million people at present.  States could cut services to generate savings, but that would raise another difficult question: “What,” he asked, “are the non-essential services that can be cut?” Noting that nursing home care, hospitalization, and physicians are all mandatory Medicaid services, Salo briefly mused about “optional” services—prescription drugs, adult vision and dental services, and the spectrum of home and community based services on which so many disabled and mentally ill people rely for support.  “Should we get rid of those?” he asked rhetorically.

With other options off the table, Salo said that “literally, the only near-term options left to balance state budgets are “ugly across-the board reimbursement cuts.”  Though he called such cuts “unacceptable,” he predicted—to the dismay of his audience—that many would happen anyway.

One urgent hope:  Savings in “dual eligible” care

Amid this bleak picture, Salo expressed hope that new approaches to treating “dual eligibles”—those who qualify for both Medicare and Medicaid—could wring substantial savings if such reforms are implemented soon enough. 

“There are many opportunities to do better with care, especially for dual eligibles, who are a small group of people on which we spend the most,” he explained, noting that although Medicare is the primary payer for many of these individuals, “duals” account for 40% of state Medicaid resources as well. 

One reason for their high cost duals’ care is simple, he says:  “They’re sicker, older, and more fragile. But the other reason is that they’re set adrift in an expensive, complicated, confusing, and dysfunctional sea of Medicare and Medicaid trying to shove costs onto the other, without thinking about the holistic interests of that patient.  Until that changes,” he continued, “we’re going to continue to see unnecessary costs for long-term care and hospitalizations.

“If we can fix that, and I believe that we can, I think that we will see this population’s healthcare outcomes improve and money spent decrease at the same time.  This will be hard,” he said citing distrust between the federal Medicare system and, states, state Medicaid systems, and managed care organizations.

The solution, he mused, is in a new form of Medicaid managed care—“some combination of ACO, shared savings approach, or nexus in which a single entity has the financial incentives to make the right decision and the authority to direct or redirect coverage and benefits.” But, he warned, “until we get there, we’re just rearranging deck chairs on the Titanic.”

Solutions can’t wait

With Medicaid systems in crisis and the 2014 coverage expansion looming, Salo asserted that “We don’t need 10 or 15 years of demonstrations or small-scale programs to get [a solution].  The longer we wait to do something, the more we will be making deep, shortsighted and reflexive cuts in the unfortunate but necessary quest for balanced budgets.

“There are solutions, but we have to be open to doing things differently. We have to embrace the price of innovations and the risk of failures.  Treading water is not a sustainable plan.”  

Salo said that although the state budget situation will resolve itself someday, “we have to deal with the future now—a future that will see us add 100,000 dual eligibles per month to the system. If we don’t get ahead of that curve, we’re going to end up in a situation where Medicaid, by its nature a very heterogeneous and varied program—we will end up pitting seniors, who have a relatively powerful  political voice, against people with disabilities, who have less power, and against moms and kids, who have practically none.”

“That kind of fight is in nobody’s best interest,” he concluded, urging that “the incentives are there for us to figure this out.  It won’t be easy, but we can do it.”