Reform may be a good deal, not a fiscal disaster, for Medicaid programs

Is it a foregone conclusion that for many states, the expansion of Medicaid in 2014 will be next to impossible, fiscally speaking? In fact, some analysts, and also some state Medicaid directors, say that Medicaid programs should come out ahead.

"In some cases, concerns expressed by states about the Medicaid expansion's impact on their budgets has been overblown," says John Holahan, PhD, health policy center director at the Urban Institute in Washington, DC.

Costs actually will be quite modest, according to Medicaid Coverage and Spending in Health Reform: National and State-by-State Results for Adults at or Below 133% Poverty, a May 2010 study by the Urban Institute and the Kaiser Commission on Medicaid and the Uninsured, also in Washington, DC.

"There are a lot of ways in which states will save, probably about as much money as they have to put up," says Dr. Holahan. "States that have complained vigorously about this are typically both overstating their Medicaid costs and not counting the offsetting costs."

Dr. Holahan says that he sees health care reform as "very good fiscal news for states. In some states, they have overstated the Medicaid costs of the Medicaid part of it. They either assume the cost per person is too high or assume higher takeup rates than we have evidence for." Other key findings:

• While the average state's Medicaid enrollment will increase by 27.4%, state costs will increase by just 1.4% on average. This is mainly because the federal government will bear more than 95% of the total Medicaid expansion cost, as compared to roughly 57% of current Medicaid costs.

• Expansion of coverage will likely reduce state costs associated with providing uncompensated care to the uninsured.

• Only between 57% and 75% of those who become eligible for Medicaid will enroll. A much lower percentage of people with private coverage will exchange it for Medicaid coverage.

"If anything was surprising, it was how big the federal share was," says Dr. Holahan, the study's lead author. "When you really compute the numbers and see them in front of you, there are a lot of federal dollars coming to states. While I recognize that it may be hard for some states to come up with their share of the money, the amount they have to spend is pretty small."

States will see savings

States and localities may support clinics and public hospitals with direct appropriations or various kinds of subsidies, and programs for mental illness or substance abuse may be funded directly through state funds. These programs, run by state governments, may no longer be necessary when millions of additional people have Medicaid coverage.

"A lot of that will be covered as a Medicaid benefit," says Dr. Holahan. "There are a lot of ways in which states will save money, though this will vary among states."

States often express concern over the "woodwork" population coming onto the program in large numbers, consisting of individuals who are already eligible for Medicaid but not enrolled. This group would be more of a financial burden for states than newly eligible individuals because of lower federal match rates.

"I think the jury is out on how much of a problem that will be, but to the extent these individuals are uninsured today, states and localities are paying a lot of their care as it is," notes Dr. Holahan.

$800 million in savings

John G. Folkemer, deputy secretary of health care financing at Maryland's Department of Health and Mental Hygiene, says that "overall, fiscally, we think that health reform saves the state money. Over the next ten years, we will probably save over $800 million as we start to phase it in, for a lot of different reasons."

While Maryland Medicaid hasn't cut any optional services, some significant provider rate cuts have been made. In addition, some provider taxes got increased, he says.

"Maryland, like other states, has faced tight coffers over the last few years. Enrollment is still going up, with more than 200,000 additional people coming onto the program over the last two or three years," reports Mr. Folkemer. "The rate of growth isn't what it was a year or two ago, but it is still growing every single month."

Not many parents are expected to come on to the program as part of the expansion population, because the state's Medicaid program already covers up to 116% FPL for parents. "Using the current rules, there are a lot of disregards. Once you take that into account, and the different way eligibility will be calculated under health care reform, our growth is going to be with the childless adults that don't have any dependent children at home," says Mr. Folkemer.

The pharmacy rebate for individuals in managed care organizations brings significant savings to Maryland, he says.

"Starting in 2014, the state will receive 100% federal funding for its Primary Adult Care program, for which it receives 50% federal funding to provide limited benefits for childless adults, as well as for newly eligible parents for a three-year period," says Mr. Folkemer.

Maryland has the third largest high-risk insurance program in the country. "That presumably would go away when all of those people qualify for regular health insurance," says Mr. Folkemer. "Also, we have a 2% tax on all insurers in the state. As more people have insurance, there is going to be more revenue coming in. So, there are a whole series of things that will produce savings. That will more than offset the costs."

Since health care reform includes opportunities for quality initiatives, this could lead to cost savings over the long term, Mr. Folkemer says that Maryland Medicaid already has many quality initiatives in place, particularly for the managed care organizations, which cover 80% of Medicaid enrollees.

These include quality reviews, Healthcare Effectiveness Data and Information Set (HEDIS) reviews, value-based purchasing, and provider surveys. A pay-for-performance component was recently implemented for nursing homes, with extra payments for meeting certain criteria.

"On the hospital side, because we have the all-payer waiver under the Health Services Cost Review Commission, there are some initiatives under way looking at such things as hospital-acquired conditions, readmission, and infection rates," says Mr. Folkemer. "For hospital services, we are working on things that involve all payers — not just Medicaid. There might be a few more opportunities that come up after health care reform, though."

Contact Mr. Folkemer at (410) 767-4139 or FolkemerJ@dhmh.state.md.us and Mr. Holahan at (202) 833-7200 or JHolahan@urban.org.