Fiscal Fitness: How States Cope

Washington struggles to preserve core program while in 'survival' mode

Washington state currently is in "survival mode," struggling to preserve as much of its core state Medicaid program as possible, in the face of a staggering $5 billion shortfall.

Doug Porter, assistant secretary for medical assistance administration in Washington's Department of Social and Health Services, says there only are three ways to manage the cost of the program: rate structure, benefits, and eligibility.

"I've been given a target of about 20% for a reduction exercise," he says. "The first place I will go will be to manage the benefit design and try and control utilization better. I may even look at some optional services we've adopted, such as interpreter services, which we might have to scrap."

The second place Mr. Porter will go is rate increases. Last year, pediatricians were given a 48% rate hike, in recognition that the 1% or 2% vendor rate increases given over the last 10 years hadn't been adequate to keep up with inflation.

Eligibility is the last thing that will be cut. "We have been under direction from our legislature to expand up to 300% of the federal poverty level (FPL). It's going to be pretty darn hard to maintain that direction," he says. "We are in a survival mode here, trying to protect the core part of our program, rather than improving or expanding."

$5 billion shortfall

In previous economic downturns in 2003 and 2005, the state faced about $2 billion in shortfalls. "We are now approaching $5 billion, so it is a bigger projected shortfall, and undoubtedly a combination of a lot higher costs for Medicaid, long-term care, child welfare, and economic services," says Mr. Porter. "If you provide all the same services to all the same eligible categories over the next two years compared with the last two years, it will cost us over a billion dollars more."

Then, you need to factor in the decreased retail or real estate tax dollars coming in. "We're in a helluva fix here. And it will take some tough decisions before we find our way out of it," he notes.

The state was directed to expand eligibility for children up to 300% of the FPL, effective Jan. 1, 2008. "We are still in negotiations with CMS over that; they have yet to approve it. But now even if they did approve it, I would question whether we could afford to do it," says Mr. Porter.

Mr. Porter says his mission is to protect the core of the program. "What we are looking at are benefits," he says. One possibility: Enhanced mental health services for children, which became effective July 2008.

"We offered to double the number of visits we would pay for, and opened up the number of different providers who could bill us for mental health services," Mr. Porter says.

Previously, only psychiatrists in the state's fee-for-services program were eligible, but now any licensed mental health professional can become a Medicaid provider.

"I don't know that I can sustain that expansion of service. Those are the kind of benefits we are looking at in making reductions," says Mr. Porter. "We just started promoting our children's expansions-and now I'm not sure if we can sustain that."

As for provider rate cuts, Mr. Porter says providers may disagree, but he thinks the state has done a fairly good job of not cutting into provider rates. During the last session when revenue was good, primary care office visit rates for children were raised by 48% for some of the most frequently used codes, in response to a request from pediatricians to make up for lost time. He says he now has to look at reducing this "catch-up" payment.

"We may be looking at a time today in this budget go-round where provider rates have to be cut," Mr. Porter says, adding that he is asking himself the question: "If they got a 48% rate increase effective last January, how much of that can I take back and not lose access? Those are the kinds of questions we're having to ask ourselves."

Process is under way

The state is currently in the middle of budget preparation activities, which started back in September 2008 with an initiative titled "Priorities of Government." "We cluster our state spending into about a dozen buckets, one of which is health care," says Mr. Porter.

Mr. Porter, representing the Department of Social and Health Services (DSHS) and the Medicaid budget, sits down with the Department of Health and representatives of other state programs, including workers' compensation and state employee benefits. "We put on the board, in a ranked order, how we would build our respective programs from scratch if we were starting today, and used the estimates of what they will cost for the next two years," he says.

First, Mr. Porter listed required or mandatory clients or beneficiaries for Medicaid, and then the optional categories and benefit services. "Everything goes on the table. You don't just talk about cuts, you talk about anything you spend money on and hold it up against an allotment that the governor's office thinks is reasonable. Then you see what fits, what falls above the line and what doesn't," he explains. "And are they critical? Does the allotment have to be increased and funds taken from some other activity?"

That part of the process has been completed, which sets the stage for each department. Next, Mr. Porter sits down with child welfare, vocational rehabilitation, and economic services to prioritize everything that is done within his own department. "We look at the budget target, and we see what falls below the line with DSHS. I think it's fair to say that the revenue projected over the next two years is such that it will require some fairly significant reductions," he notes.

One of the main principles used to determine those reductions, says Mr. Porter, is: "Can we be better purchasers?"

"Some say up to 30% of medical expenditures are either unnecessary, or harmful. We have put on the table, as Medicare has done, not paying for 'never events,' changing utilization of prescription drugs, and moving further from brand name and toward more generic drugs," says Mr. Porter. "Every percentage point we can move that needle is something on the order of a $5 million savings to the state."

Even in the best of times, the state should do more to be better stewards and reduce the cost trend, he says. "But that is not going to get us to a budget target if we are talking in the hundreds of millions of dollars. We're going to have to go deeper than that."

The next area talked about is eliminating pilot programs, some of which may go on forever whether they work or not. "And even if they work, they may never get taken to scale statewide," says Mr. Porter. "So, we said, after we do our purchasing strategies, are there pilot programs out there that we should just pull the plug on? Are they relatively new additions to the program? Have they not demonstrated their worth yet? Or maybe we have no intention to expand them to other areas, so we will just get rid of them. That's the second level of cuts."

The third level of cuts is when it "really gets tough," he says. "We have a fairly rich benefits package. Should we scale back on that?"

The very last resort is to reduce eligibility. Before that, the state will reduce benefits or provider rates, to the extent that it won't cause an access problem. However, Mr. Porter notes that when California proposed an across-the-board 10% cut on rates to its providers, the courts took the state to task for not taking into account how it would affect the beneficiary getting access to services.

"So, it's somewhat cynical to say that we are going to maintain eligibility, but we are going to cut rates to providers back so far that none will take a Medicaid client into their practices," he points out. "Then you really haven't done the client any service."

Mr. Porter says he would be surprised if he didn't have to look at making cuts in all of those areas as this plays out. "That's how severe I think the challenge will be in the next two years."