Fiscal Fitness: How States Cope

Arizona's Medicaid program awaits budget cuts; is in 'uncharted territory'

When Arizona received its Medicaid Transformation Grant in 2007, "we had a budget surplus," says Anthony Rodgers, director of the state of Arizona Medicaid/ SCHIP programs, known as the Arizona Health Care Cost-Containment System. "And within the first three months of 2007, the bubble burst in the housing market—it was the fastest negative economic downturn I've ever seen. In terms of our tax revenues coming into the state, they just kept dropping like the stock market dropped. Normally, you can forecast a slow trend downward in advance, but what we experienced was like going over a financial cliff, just straight down," he says.

As it turned out, the state's plummeting revenues were just the first problem to affect the Medicaid budget. "That just meant there were less state general fund dollars. But that was just the first of the economic consequences experienced by the state. What really started to create significant budget problems was that our caseload started to skyrocket," says Mr. Rodgers. "So, it was a double-whammy between not having the tax revenues coming into the state coffers, and the enrollment going up so dramatically."

The state budgeted for a 3% increase in Medicaid enrollment in 2008, but over the last four months, enrollment has increased by 7%. Mr. Rodgers estimates that over the next six months, Medicaid enrollment could increase as much as 11%.

It didn't help that a significant percentage of Arizona's state revenues are dependent on the housing and construction industry. "But even when revenues started slowing down dramatically, it didn't really translate into additional Medicaid enrollment coming in, until the state's unemployment rates began to increase, which didn't start to go up until the later part of 2007," says Mr. Rodgers. "So, initially, it was just a revenue shock. Now, we have the tax revenue losses and the dramatic increase in enrollment."

Arizona is "one of the states that has been really impacted by the recession," according to Mr. Rodgers. "Right now, we are estimating that we will have over $3 billion revenue shortfall the next two years — an estimated $1 billion this year and $2 billion next year. We are in uncharted territory, because we have never had this level of revenue shortfall or potential budget deficit before."

Mr. Rodgers says he is hopeful that the federal government will increase the percentage of dollars it's paying into Medicaid programs as part of a proposed economic stimulus package, which would give the state some significant relief.

"We are also hopeful that the federal government will provide the next round of Medicaid Transformation grants," says Mr. Rodgers. "It may be a problem for us to continue our health information exchange operations much past July 2009 if we don't get additional dollars, because we won't have the necessary funds to maintain the project's operation."

He says the state is in such a tight budget situation, there are no additional dollars for operations for its electronic health record and health information exchange project initiative. "Although there is a lot of excitement about our Arizona Medical Information Exchange project, and it's getting a lot of buzz from providers, continued operations will depend on the overall funding of the Medicaid program and whether drastic cuts will be necessary."

The Arizona state legislature hasn't yet determined what specific cuts will be made. "Therein lies the dilemma," says Mr. Rodgers. "The legislature has talked about deficit reduction options but hasn't made any final decisions. We have submitted a list of possible cuts, but none of those have been enacted yet. We are waiting for the legislature to give some indication of where the program cuts are going to be required. Our HIT initiatives may have to be one of those program cuts."

There are ways for the state to cover its current deficit, but it would mean borrowing against future revenues and hoping the stimulus package will be large enough to kick start the economy again. "Some in the legislature don't feel the state should be borrowing against future tax revenues to cover current budget deficits," says Mr. Rodgers. "If that is not an option, that state has to come up with the cash now to balance the budget. And where do you get the cuts that will give you enough cash?"

Mr. Rodgers tells his staff to "wait until we see where the legislature makes its program cuts before you start personnel decisions. Until then, we can't decide what the future for our HIT initiative is and what we will need in terms of project changes."

The legislature has very limited options, notes Mr. Rodgers—they could eliminate or reduce discretionary programs such as the SCHIP program, because it is not an entitlement such as Medicaid. "But if they do that, they will make a lot of children uninsured, and that goes against the progress that has been made in reducing the number of uninsured children in the state."

The legislature also is evaluating reduction of some Medicaid benefits, such as nonemergent transportation or reducing the months a person is guaranteed Medicaid eligibility without reapplying. "So, unless there is an influx of additional federal dollars and the economy starts to pick up, we have some significant budget problems to overcome," says Mr. Rodgers. "The legislature will have make some very difficult program decisions."

States 'bend the trend' in Medicaid spending growth

According to Emma Forkner, South Carolina's state Medicaid director, "ensuring Medicaid programs are efficient and cost-effective should be a paramount concern to anyone who receives Medicaid or pays taxes, particularly when state resources are stretched as thinly as they are now."

She says it's important to point out that "cost-effectiveness isn't synonymous with skimping on services." The goal, she says, is to ensure you get the highest possible value out of every dollar you spend, which translates into better-quality services for Medicaid beneficiaries.

Increasingly, states are investing in care management and "medical home" programs to better coordinate health services for high-cost patients as a way to "bend the trend" in Medicaid spending growth, says Lisa M. Duchon, PhD, a senior consultant at Health Management Associates in Washington, DC.

For example, Medicaid managed care and Primary Care Case Management (PCCM) programs are adopting various kinds of health risk assessments to identify high-risk or high-cost enrollees to get them into intensive case management services that could avoid future hospitalizations, ED visits, or uncoordinated specialty care.

Interest is building around bundling of payments that promote integrated, coordinated systems of care, often referred to as "clinically accountable organizations." These could include coordinated specialty-group practices, a hospital-centered network, and other integrated systems, says Dr. Duchon.

The Centers for Medicare & Medicaid Services (CMS) has taken an interest in how to encourage better collaboration in treating patients with complex illnesses. "To the extent that CMS experiments with payment approaches, Medicaid programs may see opportunities to do the same," she says.

Here are some initiatives states are implementing to make smarter purchasing decisions:

• Pay for-performance (P4P) incentives.

As more Medicaid programs and health plans are using P4P in care management or disease management programs, concerns are growing about how to attribute—and reward—positive clinical outcomes of patient care across a continuum of providers, says Dr. Duchon.

"Our systems of health care reimbursement aren't really set up to do that, particularly if care is provided through a health plan's provider network rather than an integrated health care delivery system," she explains. "In fact, the use of performance incentives to promote patient- centered care is helping to make the case for broader payment reform."

P4P just isn't a strong enough "signal" to overcome the disincentives in current reimbursement systems, Dr. Duchon explains. "More health care purchasers and researchers are viewing P4P as part of a transition to broader payment reform," she says.

In 2008, South Carolina initiated a program called Healthy Connections Choices, which encourages beneficiaries to choose between a variety of medical home options, including one of several managed care plans or a PCCM model. "This will ultimately give us the ability to gauge plan effectiveness and move to a pay-for-performance system," says Ms. Forkner. "People tend to think the Medicaid managed care movement is all about saving money. It's not."

The true benefit, if the program is structured correctly, is a focus on quality and health outcomes that cannot be achieved under fee-for-service Medicaid, says Ms. Forkner. "That's where we hope to be once our program is fully implemented," she says.

• Web-based access to claims history.

In South Carolina, a free statewide web-based provider tool, South Carolina Health Information Exchange, was launched. Physicians can instantly access eight years worth of a Medicaid beneficiary's claims history, including drugs prescribed to them. "This will lead to fewer unnecessary tests, reduced contraindications, and better communication among providers," says Ms. Forkner. "I'm hopeful new technologies like this will help solve some of the lingering problems we see in the health care industry."

• Incentives within managed care organizations.

Jason Helgerson, Wisconsin's Medicaid director says, "We have found that our members receive the most cost-effective care through managed care organizations. We believe that better-aligned incentives within managed care, including direct financial incentives, lead managed care organizations to keep people healthy and lower health care costs."

By receiving care through managed care organizations, members are able to establish a medical home and have their primary and preventive care managed. The state is facing a $5.4 billion shortfall, but since establishing a medical home for Medicaid clients is an integral part of the state's BadgerCare Plus program, this initiative will not be affected by any budget cuts. "We are always looking for ideas for cost containment. In a budget environment like this, it would only expedite cost-containment initiatives, not hold them back," says Mr. Helgerson.

• Prevention.

States are getting much better at identifying prevention programs that lead to results and those that may not, according to Jonathan Seib, advisor to Gov. Chris Gregoire in Washington state. "Evidence-based practices extend to public health as well. In budgeting, what matters is the cost. But what we are less able to capture is the ROI," he says.

The savings are significant—"but it may be a ways down the line," says Mr. Seib. "If, as a result of a state program, I don't pick up smoking, the time lag between when I otherwise would have gotten sick could be decades. It is sometimes difficult to measure the economic impact of prevention programs and public health programs, but we know they are real," he says. "We know not only does it benefit the health of people in Washington state that we have a tobacco cessation program, but in the end, we pay less for tobacco-related illness."