It is estimated that 70 percent of individuals who turned 65 in 2017 will utilize some type of long term service or support during their lifetimes1 and in 2014, almost one-third of nursing facility services and over half of other support healthcare services, including home and community-based services, were paid for under the Medicaid Program, not Medicare.2 This projected need for long term care services poses significant financial implications for state and local governments that will be required to make available, and fund, an increasing demand for these expensive healthcare services.3
Overview – The Medicaid Program
Financing for the Medicaid Program is both a state and federal responsibility. States are eligible to receive federal matching funds toward allowable expenditures, provided they meet specific requirements.4 Generally, each state is assigned a federal medical assistance percentage (FMAP) based upon the state’s per capita income with no FMAP being less than 50 percent nor more than 83 percent.5 Currently, Mississippi has the highest FMAP, at 74 percent, with 13 states receiving the minimum 50 percent match.6
States may generate their share of the Medicaid expenditures through a variety of methodologies, including state general revenue, contributions from local governments, and specialized revenue sources.7 The majority of state Medicaid revenue comes from traditional sources such as state income and sales taxes. Local entities, including municipalities and counties, often contribute through expenditures for services provided at government owned or operated hospitals. Specialized revenue sources, such as the implementation of healthcare related taxes, are also a means to match federal funds, although these funding mechanisms have come under increasing scrutiny based on concerns that the funds do not contribute to increased or improved services.8
The majority of Medicaid funds are spent on long term services and support (LTSS) provided to the disabled and elderly. LTSS is generally defined as services and support provided to individuals, who have functional limitations and/or chronic illnesses, to allow these individuals to live or work in the setting of their choice, including their home, a worksite, a nursing facility, or other institutional setting.9 While the elderly and disabled accounted for only one-quarter of Medicaid enrollees, they utilized two-thirds of all program spending.11 Medicaid spending for LTSS in 2015 equaled approximately $158 billion.10 Given that Medicaid spending generally accounts for up to 15 percent of all state funded spending, it is clear why more and more states are looking to limit and better manage the payment arrangements that fund Medicaid services.12
Background – Medicaid Managed Care
As their name implies, managed care programs are designed to manage the cost, utilization, and quality of services provided. However, they are also tasked with providing for the delivery of essential health benefits and additional services while at the same time improving healthcare quality and outcomes as well as health plan financial performance.13 Given the growth in Medicaid spending, it is no surprise that states have been turning away from fee-for-service payment methodologies and looking to managed care programs as a means to achieve cost stability and savings while still maintaining the level and quality of services for their citizens. As a result, enrollment in Medicaid managed care programs has been steadily increasing. In 2002, when the rules governing Medicaid managed care were originally passed, just over 23 million beneficiaries were enrolled in managed care plans.14 By 2014, enrollment had increased to over 55 million, including elderly and disabled beneficiaries enrolled in managed long term services and support (MLTSS) programs.15 In fact, enrollment in MLTSS programs grew by 175 percent between 2013 and 2014.15
Implementing Medicaid managed care programs carry unique challenges. Unlike the Medicare program, with regulations and requirements that are uniform across the country, variability in Medicaid is the rule rather than the exception. Each state establishes its own eligibility standards, benefit packages, provider payment policies, and administrative structures under broad federal guidelines. Additionally, each state finances its programs in different ways. Thus, in reality, there isn’t one Medicaid program but 56 Medicaid programs — one for each state and territory as well as the District of Columbia.
States seeking increased flexibility in their Medicaid programs, including the use of managed care programs, must apply for formal waivers of statutory requirements.17 These waivers are typically identified by the section of the Social Security Act (SSA) granting such authority. State individualized MLTSS programs can generally be operated under the waiver authority contained in Sections 1915, 1932, and 1115 of the SSA and each of these sections has its own specific requirements.18 For example, to obtain waivers under Section 1915(c) and 1115, states must demonstrate that estimated federal spending under the waiver will be budget neutral, meaning it will not exceed estimated spending without the waiver. In contrast, 1915(b) waivers need only to demonstrate that they are cost effective and efficient. However, all of the waivers permit states to avoid (a) statewideness requirements (states can implement programs in specific areas of the state), (b) comparability of services (states can offer different benefits to individuals enrolled in managed care programs) and (c) freedom of choice (states can require beneficiaries to receive services through a managed care plan or primary care provider).19
I. New Medicaid Managed Care Regulations
Acknowledging that significant changes had occurred since it first passed rules governing Medicaid managed care, The Centers for Medicare & Medicaid Services (CMS) published final regulations in May 2016 (2016 Regulations) to revise and strengthen Medicaid managed care requirements.20 For the first time, the rules include provisions specific to LTSS. However, although LTSS was not specifically addressed in the 2002 managed care regulations, CMS had in 2013 issued guidance on the significant elements it believed to be essential for strong MLTSS programs. The guidance identified 10 critical elements that were developed based upon the review of successful established state programs and with input from advocacy groups, federal partners and recognized experts.21
CMS extensively utilized the 2013 guidance in developing its new MLTSS managed care provisions made part of the 2016 Regulations. The 10 elements and their reflection in the new 2016 Regulations are as follows:
1. Adequate Planning - obligates states to consider the unique characteristics of LTSS in monitoring and evaluation activities, including readiness reviews.22 Further, additional standards have been imposed on the marketing materials provided to and communications with enrollees and potential enrollees, including the requirement to provide information on transition of care, who to contact for support, and increased standards for provider directories.23
2. Stakeholder Engagement - ensures that the views of beneficiaries, personal representatives, providers and others are solicited and addressed in a meaningful way during the design, implementation and oversight of MLTSS programs.24
3. Enhanced Provision of Home and Community Based Services - increases access by ensuring that all MLTSS programs must comply with the Americans with Disabilities Act (ADA) and the Supreme Court decision in Olmstead v L.C.25
4. Alignment of Payment Structures and Goals - encourages achievement of the goals of MLTSS programs of improving health, supporting the beneficiaries’ experience of care and community integration of enrollees, and reducing costs.26
5. Support for Beneficiaries - ensures that all MLTSS programs provide (a) an access point for complaints and concerns about managed care enrollment and access, (b) education on the grievance and appeal process, (c) assistance in navigating the grievance and appeals process, and (d) review and oversight of LTSS data to provide guidance to states on identification, remediation and resolution of systemic issues.27
6. Person-Centered Process - requires identification, assessment, and treatment/service planning for individuals receiving LTSS. Additionally, such services must be performed by appropriately qualified service coordinators trained in consultation with the enrollee and the enrollee’s providers.28
7. Comprehensive Integrated Service Package - requires MLTSS to be coordinated between care settings, including appropriate discharge planning, between payment sources, and with community and social support providers.29
8. Qualified providers - ensures that an adequate network of qualified providers exists by establishing time and distance standards as well as other requirements for provider types that travel to the enrollee. Additionally, providers must have capabilities to ensure physical access, accessible equipment, and accommodations.30
9/10. Participant Protections and Quality - Together require participation in state programs to assess the quality and appropriateness of care as well as efforts to prevent, detect and remediate critical incidents that adversely impact enrollee health and welfare and the achievement of quality outcomes.31
Elimination of Pass-Through Payments
Pass-through payments are amounts paid by Medicaid managed care plans to providers as supplemental payments to the contracted payment rate. Pass-through payments are specifically defined as:
Any amount required by the state to be added to contracted payment rates between the managed care plans and hospitals, physicians and nursing facilities that is not for any of the following purposes:
1. A specific service or benefit provided to a specific enrollee covered under the contract;
2. Permissible provider payment methodologies outlined in § 438.6(c)(1) of the final Medicaid managed care regulations;
3. A sub-capitated payment arrangement for a specific set of services and enrollees covered under the contract;
4. Graduate medical education (GME) payments; or
5. Federally qualified health center or rural health center wraparound payments.
These payments are typically made to hospitals, nursing facilities and physicians and are intended, as states move from fee-for-service to managed care programs, as a means of ensuring a consistent payment stream for safety net providers. Additionally, these payments assist in preserving existing Intergovernmental Transfers, Certified Public Expenditures or provider tax mechanisms associated with supplemental payments under the Upper Payment Limits program.32 For safety net providers or those with a large Medicaid patient base, pass-through payments are often a significant source of revenue.
Under new regulations issued January 18, 2017 (Pass-through Regulations)33 CMS is requiring states to phase out pass-through funding as it does not consider these payments to be actuarially sound. In its commentary, CMS states that actuarially sound capitation rates must account for all reasonable, appropriate and attainable costs that are required to provide services under the contract and associated administrative costs during the term of the contract. As pass-through payments do not tie provider payments to the provision of services, they fail to meet CMS’ standards.34 The Pass-through Regulations do, however, include a transition period to allow states to restructure these payments into permissible payment mechanisms such as pay-for-performance or enhanced payment rates. Effective for contracts beginning on or after July 1, 2017, the transition period is 10 years for payments to hospitals and five years for nursing facilities and physicians.35
The exact effects of the elimination of pass-through funding are not yet entirely clear. There are concerns that requiring payments to be tied to utilization of services by Medicaid beneficiaries may spread funding among a greater number of providers than intended. This may leave fewer funds available for true safety net providers. Additionally, fluctuations in payments caused by changes in utilization may provide less predictability for providers. This is particularly harmful to smaller providers, who typically have fewer resources available to weather changes in funding. Given that nursing facilities traditionally serve large numbers of Medicaid recipients and often act as safety net providers, and that many LTSS service providers are small businesses heavily dependent upon Medicaid funding, the impact of the elimination or restructuring of pass-through payments may potentially be significant.
II. The Future of Medicaid Managed Care
With the change of administration, the future of the Patient Protection and Affordable Care Act (PPACA) is uncertain. For many years, there have been discussions regarding repeal of PPACA and serious efforts are underway to accomplish this goal through passage of the American Health Care Act (AHCA). Much of the discussion relating to the AHCA surrounds potential changes to the Medicaid Program and has focused on limiting federal contributions and giving states more authority to design their own Medicaid Programs. Two of the key proposals under consideration are block grants and per capita amounts reflecting enrollee characteristics. Additional proposals, although less likely to be implemented, include capped allotments for each state and shared savings and risk for spending relative to per capita targets.36 At this time, it is too early to offer any predictions on which approach, or combination of approaches, will be implemented. However, as LTSS providers rely heavily on Medicaid funding, any change will almost certainly have a significant impact. Below is a brief discussion of each of the proposals currently under consideration.
Block grants are typically lump-sum payments made to states to spend on a specified array of services based upon a predetermined formula. States would not generally be required to provide matching funds to obtain block grant funding but would be subject to some level of federal oversight and may be required to maintain a certain level of state funding.37 The benefits of block grant funding are the provision of some certainty on federal obligations for Medicaid spending and greater flexibility for states in establishing program priorities. However, a significant potential downside for states is the limitation on financial resources available to respond to unexpected growth rates in enrollment or clinical costs. For example, Harvoni, a drug used to treat Hepatitis C, was approved for use by the U.S. Food and Drug Administration in late 2014. By 2015, Medicaid spending on Harvoni had reached over $2 billion, a cost not incurred in prior years and the type of unexpected expenditure unlikely to have been accounted for in developing block grant payment amounts.38 Additionally, there is no guarantee that future increases in federal block grant funding will increase proportionally with the cost of medical spending.39
Per capita limitations establish ceilings on the amount of federal funding available per beneficiary. While the total amount of federal funding is not pre-determined (increases in the number of enrollees results in increased federal funding), the amount per beneficiary is set in advance and does not fluctuate. These caps can be determined in the aggregate or based on sub-groups, such as children, seniors or the disabled. The benefits of per capita caps are that they provide states with greater resources to deal with program changes, such as the increase of eligible beneficiaries that occurred after the economic downturn in 2008. Given that historically increases in Medicaid spending have been driven by growth in enrollment, not increases in cost, whether per capita caps would provide sufficient predictability of federal costs or cost savings is uncertain.40
Capped allotments limit the amount of federal matching funds provided to states. Unlike block grants, which require no match, states typically remain required to allocate matching funds under capped allotment funding systems. However, the ultimate total amount of federal funding received is set at a predetermined level. Capped allotments are predicted to allow greater control and predictability over federal spending. Currently, the Children’s Health Insurance Program is funded under a capped allotment formula but whether this mechanism can be successfully utilized to finance a much broader, and more costly, array of services remains unknown.41
A shared savings approach establishes state specific per capita spending targets based upon historical program spending. States must continue to provide matching funds but would be eligible to share in any savings that resulted from spending less than the targets. The share of savings would also be contingent upon a state’s meeting specific quality and performance criteria. The benefits of this approach are that states are incentivized to provide services in an efficient and economic manner and are provided the flexibility to do so. While shared savings programs have been utilized in small scale programs, they have not been implemented utilizing state-wide data or on a large scale trial basis.42
Provider Considerations Under Medicaid Managed Care Contracting
While the implementation of managed care programs has been reshaping healthcare for many years, the application of these programs to the provision of long-term care services has occurred at a slower pace. For this reason, many LTSS providers, particularly smaller providers, have less experience with, and are less prepared to deal with, the multiple changes to business practices and service delivery that often accompany the transition to managed care payment methodologies. Some of the challenges LTSS providers may be faced with, and should plan for, are as follows.
1. Need for Accurate Pricing Data
The heart of successful managed care contracting is understanding the cost of providing services and ensuring that those costs are adequately captured in any proposed pricing structure offered under a managed care contract. Further, managed care companies may require more detailed pricing structures than state agencies. Thus, providers will need to ensure that any pricing structures offered by, or accepted from, any managed care entity is sufficient to cover the risks being undertaken.
2. Extensive Contracting Requirements
LTSS providers will need to carefully review all requirements of any managed care contract under consideration. These provisions may be stricter than those imposed under state programs. For example, admissions may be required on weekends or on a 24/7 basis rather than only during normal business hours. Providers should ensure they have the ability to meet these new and additional demands.
3. Enrollments and Disenrollments
One complexity for providers under managed care arrangements is the ability of enrollees to cycle on and off specific plans in search of better benefits or lower costs. However, with Medicaid recipients, this issue is compounded by the on again/off again nature of Medicaid eligibility as the recipients lose coverage when they no longer meet eligibility requirements or gain it when eligibility requirements are met. While it is less likely there will be significant turnover for patients receiving nursing home and assisted living services, enrollment consistency with beneficiaries receiving outpatient services may be more uncertain.
4. Impact on Financial Viability
Some managed care entities may impose strict audit and pre-authorization requirements on providers. These potential delays in acceptance of patients or greater scrutiny of services provided and payments received may impact cash flow and threaten the financial viability of smaller providers with fewer financial reserves.
5. New Billing Requirements
Multiple contracts with managed care entities will result in providers potentially needing to learn multiple billing systems and requirements. Unlike state agency run programs, which typically will have one set of procedures for all beneficiaries, each managed care organization will have its own policies and procedures. Failure to follow these new requirements could potentially cause providers to have payments delayed or denied.
6. Increased Risk in Contracting
Managed care organizations will be likely to limit their own risks for patient outcomes and shift these risks to providers. It will be important for providers to fully understand the criteria under which they will be judged by these managed care entities and what risks they are undertaking in any contract.
7. Phasing Out Pass-Through Payments
Nursing facilities that currently receive pass-through payments will need to work closely with local state Medicaid agencies as well as any contracted managed care plans to fully understand any replacement payment methodology.
8. Reduction in Funding
If AHCA is passed in its present or a similar form, cuts to Medicaid funding could be drastic and it can be expected that many Medicaid recipients will lose their coverage. Such losses in funding and coverage will almost certainly have a significant impact on providers, particularly rural providers who typically serve larger numbers of Medicaid recipients. Although it is impossible to predict the exact nature of these reductions, providers should be prepared for changes in the level of future funding.
9. Becoming an Engaged Stakeholder
With stakeholder involvement considered an essential element, LTSS providers should continue, or begin to, work with state Medicaid agencies to ensure that any managed care programs designed and implemented by the state are appropriate and incorporate the unique needs of LTSS beneficiaries and providers.
With the prospect of reduced federal funding looming, state and local governments will increasingly look to managed care as a means to stretch ever shrinking healthcare dollars. For this reason, managed care will continue to grow as a way to provide services more effectively and efficiently within the Medicaid Program, and the provision of LTSS will be part of this trend. LTSS providers and other stakeholders will need to maintain a keen eye on new developments in service provision and funding to ensure that they understand and adapt to these changes in a manner that allows them to continue to provide quality services to the elderly and disabled who depend upon their care.