The battle is on to control soaring costs of Medicaid's chronically ill

Evidence is mounting that a very small group of high-cost chronically ill clients accounts for the lion's share of costs in Medicaid programs. "It's pretty well established that the majority of your expenditures are for basically 5% of the population, with over 20% of expenditures going to just 1%," says Stan Rosenstein, MPA, principal advisor at Health Management Associates in Sacramento, CA, and former California Medicaid director.

Controlling costs for this population, says Mr. Rosenstein, "is clearly where the focus needs to be, and states fully recognize that."

In addition, the newly eligible population coming onto the Medicaid program as of 2014 is expected to be sicker than the current Medicaid population, Mr. Rosenstein notes. Over 40% of uninsured people eligible to receive subsidies through the health insurance exchanges have chronic conditions, or report fair or poor health, according to a December 2010 study from the Washington, DC-based Center for Studying Health System Change, Are the Uninsured Eligible for Premium Subsidies in the Health Insurance Exchanges?

As for the high-cost population, "when you drill down into who these people are, most of them are very ill," says Mr. Rosenstein. "Many are at the end of their lives. Many have severe mental illness and chronic illness together. There are clearly better ways to manage their care."

Already bare bones

Michael Sparer, PhD, JD, department chair and professor of health policy and management at Columbia University's Mailman School of Public Health in New York City, says that the "heart of the problem for state officials is that there are cross-cutting pressures around Medicaid. These are very difficult to solve."

On the one hand, says Dr. Sparer, there is pressure for Medicaid to be used as a vehicle for expanding access. "Medicaid is probably the most cost-effective way to provide care to the uninsured," he says. "Thus, it comes as no surprise that the PPACA [Patient Protection and Affordable Care Act] has such a significant Medicaid expansion as a way of providing coverage for some 16 million uninsured."

On the other hand, says Dr. Sparer, Medicaid is traditionally financed through a system where states have to pay a significant chunk of the costs. "States do have severe budget deficits at this time," he adds. "States have to think very seriously about how they are going to pay their share of the bill."

This adds to the challenge of how to cut costs, as Medicaid is a "pretty-bare bones program already," says Dr. Sparer.

"You could cut reimbursement, but Medicaid is already a pretty low payer, as providers would be the first to tell you," says Dr. Sparer. "There is not a whole lot to cut, and you wind up with huge political battles with providers over those cuts. So that is not such a great strategy."

While Medicaid programs can cut certain optional benefits such as dental, mental health, vision, and podiatry, says Dr. Sparer, states are not going to cut the high-cost benefits such as inpatient hospital care that would save significant sums.

In addition, he says, cutting optional benefits raises political problems with providers and beneficiaries. Doing this might actually end up costing the program more, adds Dr. Sparer, as when a Medicaid client doesn't get his or her mental health coverage and winds up in an ED instead.

"You can try to get at fraud and abuse, but it's tough to get significant savings around that," says Dr. Sparer. "You can try to do more managed care, you can cut prescription costs, or do more HIT. There are a whole host of strategies, but cutting costs is not easy to do."

Dr. Sparer says the Medicaid expansion will be a "very different proposition" depending on the generosity of the state's current coverage. "Some states will not have a very significant Medicaid expansion because the state already has pretty close to what the law requires," he explains. "Other states will see a huge expansion."

States will need to decide whether coverage will be through fee-for-service or managed care, and if managed care, what kind, notes Dr. Sparer. However, most importantly, he says, states are going to have to find ways to control the costs of chronically ill individuals with multiple conditions.

"That is probably the one arena in which states do have some ability to do something that could both improve the quality of care for the beneficiary and also save some money," says Dr. Sparer. "I would think that would be at the top of the agenda for states, going forward."

Excluded from managed care

Historically, chronically ill individuals have been excluded from managed care, says Dr. Sparer. He notes that some pilot projects are currently under way that move this population into managed care.

"But when you scale those up, you end up with very different economic patient populations, and different cultural and political environments," says Dr. Sparer. "So that is very tough to do."

Most managed care organizations (MCOs) just don't have much experience managing the care of the chronically ill, says Dr. Sparer. "Medicaid agencies began by getting the mainstream commercial MCOs — the Aetnas and the Oxfords — to take on the Medicaid population. They were perhaps willing to take on the young and healthy, because those were the populations they served in the commercial market," he explains.

Politically, the elderly and disabled have both been resistant to managed care, adds Dr. Sparer, and these groups have more political influence than young welfare beneficiaries. "The early poster child of Medicaid managed care was the 12-year-old kid with a sore throat sitting in the ER for six hours. That, managed care could do something about—they could get a primary care doctor for that kid," he says.

Managing the care of chronically ill, mentally ill, substance-abusing individuals is far more difficult, says Dr. Sparer.

After MCOs started covering the young and healthy Medicaid population in the early 1990s, the realization was made that the biggest cost savings was not in that population, adds Dr. Sparer. "It was with the higher-risk chronically ill population," he says. "Now, they are struggling to try to figure out how to care for that population."

Early investment

States have to spend some money early on, in order to develop a good care management program, with the hope of saving money over the long term, Dr. Sparer says. "If a state is under huge fiscal pressure, it is going to pause before investing money in care management programs. They are under serious pressure to cut their costs, not increase them," he says. "That is definitely an obstacle."

Dr. Sparer says that it is difficult to explicitly demonstrate the cost savings that will come from care management of the high-cost Medicaid population.

"Part of the reason it's tough is that there are times when care management could actually cost you more," he says. "If you can really do effective care management of the diabetic, or the asthmatic, there is a lot of money to be saved there." On the other hand, says Dr. Sparer, Medicaid will spend more money on additional screenings and preventive services.

Regardless of the upfront costs, though, Dr. Sparer says that Medicaid programs are spending so much money on the high-cost chronically ill clients that they simply must pay attention to this population.

"There is no guarantee that these new programs are either going to work," says Dr. Sparer. "But I think states can save money, if they do this efficiently and well."

Contact Mr. Rosenstein at (916) 792-3740 or and Dr. Sparer at (212) 305-5611 or