Medicaid Budgeting in Hard Times: Lessons Learned from Arizona

Tom Betlach, Speire Healthcare Strategies

It has been over a decade since many states faced the significant fiscal challenges that many are facing now. In addition, over that period, Medicaid has gone through substantial changes that impact how states need to implement budgetary actions. New populations, enhanced federal financing and increased use of federally approved provider assessments have resulted in a different Medicaid math that states need to incorporate into budgetary planning.

I was Medicaid director during the Great Recession. Arizona had to implement some of the deepest cuts in Medicaid in the country because of tremendous fiscal pressure in our state. In response to that pressure, the state reduced eligibility, provider rates, benefits, and administrative support for the Medicaid program. Along the way, we learned lessons that are still applicable today. The following are recommendations for state Medicaid programs as they grapple with tighter state budgets and increasing economic uncertainty:

• Provide a budget analysis that delineates General Fund, State Match and Total Fund impacts. This may seem obvious, but having been a state budget director, it is important to remember budget staff and policymakers can oftentimes be hyper focused on General Fund savings. It is crucial to ensure policymakers and stakeholders understand the Total Fund impact. Very few programs have the multiplier effect that Medicaid offers. When local dollars, assessment funds and federal participation are all included, every $100 in cuts may only generate 10 cents or less in General Fund savings.
• Understand the technical impacts associated with reductions in provider rates. These may seem a straightforward approach to generate savings because they can be scored and implemented in a near-term timeframe. I would recommend that a spreadsheet be developed that demonstrates what a 1% rate reduction generates in Total Funds and General Funds. As part of this analysis, it is important to identify limitations to rate reductions. For example, Federally Qualified Health Centers receive payment under the Prospective Payment System which, under federal statute, cannot be reduced. Prescription drug pricing cannot be reduced through across the board reductions. It is also important to ensure that policymakers and the Medicaid team understand what statutory structures exist in state law. Once a state creates the table by provider type for a 1% reduction, it becomes helpful in analyzing varying levels of reductions. Finally, the impact on providers should be studied. A 1% rate reduction on a provider that has no commercial or Medicare enrollees like an Intermediate Care Facility for Individuals with Intellectual Disabilities will be impacted much more than a hospital that serves 50% commercial patients, 30% Medicare patients, and 20% Medicaid patients.
• Medicaid leaders should develop tools that can enhance their understanding of how various providers and managed care plans are performing. Hospital and nursing facility cost report data can be used to analyze overall provider profitability. This information can provide decision-makers with more context in terms of understanding the impacts of cuts. Several states, including Arizona and Colorado, have developed these types of reports.
• Once the analysis is complete, establish a clear timeline of how quickly provider rate reductions can be implemented. It may be surprising to see how many months it takes to institute comprehensive rate changes because of administrative requirements like state plan amendments at the federal level and rules and/or legislative changes at the state level. Work with your actuary team to determine the overall capitation rate savings that would be achieved and the timing associated with those reductions. Identify where the state would need to reduce accompanying fee-for-service rates. Develop a timeline for regulatory action including state plan amendments, managed care contract changes, and review by the Centers for Medicare & Medicaid Services.
• Work with subject matter experts to evaluate benefit change options. While there are several benefits that are optional in Medicaid, eliminating these services may be counterproductive in generating savings. Reductions in home and community-based services will likely result in higher costs of care with increased institutionalization. While pharmacy is an optional benefit, elimination of this benefit will not reduce the program’s overall costs.
• Develop and execute a comprehensive communications strategy. Different stakeholders, policymakers, and enrollees will want to better understand the Medicaid budgetary changes and potential impacts. It is helpful if Medicaid leaders can speak to the broader fiscal environment as part of their messaging. How big is the Medicaid agency comparatively to other state programs from a State Match and Total Fund perspective? How much has Medicaid grown compared to other programs over the past several years? Additionally, Medicaid leaders will want to have content that explains how any potential budgetary actions impact members and various provider types. Finally, ensure that staff understand the reasons that reductions are being made and offer a vision for how sustainability is important in protecting the core components of the program.
• When possible, start sooner rather than later. Every month that cuts are delayed increases the amount that needs to be reduced in a fiscal year. For example, if a program needs to reduce the budget by $50 million and leaders wait until six months into the fiscal year, on an annualized basis a Medicaid program may need to take actions that generate $100 million in cost reductions. Some budgetary actions can generate one-time savings, but many of the reductions like rate reductions or benefit changes are permanent changes.
• Evaluate programmatic and structural changes that may not result in near-term savings but can be transformational reforms. In Arizona, we leveraged the budget crisis to advance behavioral health integration. While there were no near-term savings that could be scored, with the increased focus on the program we engaged policymakers on the benefits of reduced fragmentation.
• Ensure appropriate resources and strategic focus on fraud, waste and abuse (FWA) programs. In Arizona, even though the budgetary challenges resulted in reduced administrative support, policymakers invested in additional resources for FWA. We developed an overarching FWA strategic plan and ensured we could communicate to stakeholders and policymakers all the actions we were pursuing to strengthen the program as part of our overarching fiduciary responsibility.

Implementing budget reductions is inherently challenging and complex, and Medicaid leaders face a growing list of competing priorities. However, at the end of the day, Medicaid is a healthcare financing program. Investing time and resources in developing strategies to manage fiscal constraints is challenging but also critically important work, especially given the headwinds states are facing.