What a Medicaid block grant program would mean for hospitals: 5 key questions answered

Republicans have floated the idea of transforming Medicaid into a block grant program for years, and now with control of the White House and Congress, they are in a position to make the change.

The Medicaid block grant system would provide states with fixed federal grants for Medicaid spending. The amount of the grant would vary by state, depending on the state's population, and states would be able to decide how to spend the grant money as well as regulate who qualifies for services in the state. The states could also cap enrollment.

Here, Navigant Managing Director Dave Mosley answers five questions about how a Medicaid block grant program would affect hospitals and how healthcare providers are preparing for the future.

Question: What are the pros and cons of the Medicaid block grant program for hospitals?

Dave Mosley: The vast majority of newly insured individuals via the ACA have not obtained commercial insurance through the exchanges or elsewhere. Rather, most are covered through state Medicaid programs — typically the payers with the lowest payment rates to hospitals or health systems. For those that have obtained commercial policies, the high deductibles and co-pays have shifted a significant portion of provider charity care to bad debt, which is not a part of the calculation for Medicaid disproportionate share hospital payments.

Unless providers are participating as payers in the block grant or a per member per month program, they will face continued Medicaid reimbursement pressure. Historically, states have decreased payments to hospitals in advance or instead of reducing payments to other providers or eliminating optional services. Often, legislators believe that this is appropriate as providers have the ability to "pass-off" Medicaid losses to commercial payers. However, this simply increases the "hidden tax" on employers and working residents within such a state. For state health systems, the cuts may require that blended dollars — federal and state — be offset with whole state dollars — general fund — to cover costs no longer reimbursed.

One needs to consider that half of all Medicaid expenditures are for services that are covered by no other health insurance. Thus, it's a misnomer to refer to Medicaid as health insurance, particularly in comparison to commercial insurance, Medicare or military programs. Yet, while noncurative and nonrestorative, these services are most frequently delivered to the most fragile members of our populations. Further, Medicaid is often the only payer for such services. With no ability to "shift" cost burdens to other payers, these providers are rarely at the forefront of any rate reductions.

Consider that nursing homes may represent less than 25 percent of a typical state's Medicaid budget and the fact that no commercial insurance covers unlimited nursing home days. Medicaid beneficiaries represent more than 75 percent of all nursing home days and nearly 70 percent of all nursing home revenues. Is it appropriate to include nursing home care or other services not applicable to any health insurance policy when calculating block grants to support Medicaid? Or should such noncurative and nonrestorative services be considered separately from physician, pharmaceutical, hospital, imaging and other such costs?

States are risk adverse by nature. If the federal government increases risk through block grants, states will push the risk to managed care. In state after state, when Medicaid managed care organizations receive "inflation" adjustments attributable to medical loss ratio, providers — particularly hospitals — rarely see a corresponding adjustment reflected in payments received from MCOs.

If and when hospitals are payers, such as through a provider-sponsored health plan, they have the ability to control risk, share in savings and otherwise manage both financial and clinical matters from a perspective that may differ from commercial MCOs. Further, the participating hospitals are able to keep substantial portions of administrative costs (as much as 15 percent) within states. While commercial MCOs often create shared-savings arrangements with hospitals, these arrangements typically share only a fraction of savings with providers.

Q: How could the block grant system for Medicaid change from the ACA?

DM: It has rarely been contemplated that block grants would encompass all populations and all services within Medicaid. Further, the ability of states or their MCOs to profoundly impact the service spend per beneficiary varies considerably by beneficiary type. It would be logical under any capitated arrangement for states to consider a minimum of three classes of beneficiaries distinctly: the Temporary Assistance for Needy Families population; the aged, blind, and disabled population; and the newly insured, usually able-bodied, childless adults. However, even if classes are narrowly defined and treated differently, there still exists a vast disparity in the services that have historically been afforded by states.

For ABD, there is a large opportunity to bend the cost curve in short order, but little ability to push it down further over time. There is also a huge disconnect in coordination among dually eligible individuals; while this profoundly impacts aggregate cost (Medicare plus Medicaid), it also represents one of the greatest opportunities for improvement in care coordination, wellness and spending.

Block-granting TANF recipients — for instance, healthy women and children — seems plausible, but savings opportunities are slim since this is the largest Medicaid population representing a disproportionately small percentage of Medicaid spending. Putting providers at risk through obstetric bundled payment programs is an approach that could decrease cost and patient safety issues associated with nonvaginal birth and neonatal intensive care, but such programs are still in their infancy.

The fact is, most states have no experience capitating services for the entirety of their Medicaid populations. Moreover, the costliest beneficiaries — per member per month — are often not in managed care. This can certainly be accomplished and there are plans willing to accept the risk, but provider associations, such as those representing nursing homes, remain vehemently opposed.

Q: As a state-led initiative, what should providers look out for as they make plans for the future? Will there be a difference in Medicaid expansion states vs. nonexpansion states?

DM: Providers must seek transparency into the "black box" of managed care. State leaders, even Medicaid directors, can fail to understand the term "actuarial soundness," and use it synonymously with value, market price, or something akin to the Kelly Blue Book for cars. This is far from the truth, as the term simply means that the rates states pay to plans covers the plans' cost, but there is no explicit or implicit requirement that the term addresses the cost of Medicaid providers whatsoever.

Hospitals would benefit from legislation requiring state Medicaid programs to report quarterly, if not annually, on percentage of costs paid to hospitals by Medicaid MCOs. However, despite contractual provisions requiring such, many states have been unwilling or unable to compile this information. Hospitals are the backbone of healthcare, receiving the highest percentage of Medicaid dollars spent on "curative and restorative services," and they would benefit from being informed participants with states in crafting Medicaid payment and service delivery policies.

As late-movers to capitation begin to address hospital services, it is understood that they will lose the ability to make upper payment limit payments, which take Medicaid payments by class of hospital (government, nonstate government, or private) to a level equal to Medicare payments. The nonfederal share of supplemental payments has often been financed by hospital taxes, certificates of public expenditure, intergovernmental transfers or other creative methods. In fact, many of the financing methods are referenced in state statute and are specifically tied to supplemental payments. But what happens when the UPL program must be abated due to all hospital services being under capitation? Legislation precludes supplemental payments to hospitals (except DSH) when Medicaid inpatient and outpatient services are paid by Medicaid MCOs.

This begs the question: If states want to get hospitals to the Medicare rate, why aren't MCOs required to pay at the Medicare level and back into the rates while still receiving financial assistance from the hospitals? If we don't take this approach, I anticipate a precipitous decrease in hospital participation in financing at the state level and a simultaneous increase in burden on state general fund obligations.

Not only will there be much challenge in normalizing any capitated federal payments — block grants or PMPM — between historically Democrat-led and Republican-led states, it's also possible that there would be difficulty in normalizing for payments between the expansion and nonexpansion Republican states. Northern, historically Democrat-led states frequently have far more generous service menus and eligibility criteria, whereas Republican states have traditionally offered fewer "optional" services to less expansive populations.

Q: What are the smartest hospitals and health systems doing today to prepare for the potential change in the Medicaid program?

DM: Forward-thinking providers are meeting collectively to not only prepare for looming changes but to develop platforms for presentation to elected officials at state and federal levels, including Congress.

In many states, a few health systems account for up to 30 percent of total Medicaid spending. Further, they serve as the hub in the hub and spoke model, particularly in rural areas where they are the key to access to both medical care and all services afforded to Medicaid beneficiaries.

It's essential to remember that no two states are the same, and it would appear short-sighted for state hospital industries to rely upon national advocacy organizations. However, there are many similarities between Medicaid programs and hospital industries in certain areas, such as the Gulf Coast states. While providers within states must address the requirement to be nimble, informed and prepared for pending changes, it is vital that they also work collectively toward influencing their state platforms, as well as coordinate with similar states in order to effectively leverage federal resources.

Q: Where do you see the biggest opportunities for hospitals to innovate for Medicaid patients, given potential changes to the Medicaid program?

DM: First, providers must become better informed regarding Medicaid MCO contracts, payments and performance. Doing so requires access to concurrent, complete and compliant reporting data that many states currently lack. CMS issued a well-crafted final rule that should afford much transparency into the Medicaid MCO "black box;" however, it remains to be seen whether CMS will enforce the rule and if states will use the new data mandates to provide greater accountability and transparency.

It is given that states will increasingly rely upon managed care, but this need not be a continuation of the "black box" scenario whereby actuaries, for example, apply inflation adjustments to the medical component of PMPM payments to plans, without evidence suggesting increases actually go to providers. Transparency and the public dissemination of both performance and granular financial data will improve the ability of providers to negotiate with plans while simultaneously engaging state legislative leaders. When, for example, inflation adjustments are incorporated into PMPM rates for Medicaid MCOs, there should be a prior or forward period of paid claims data substantiating that rates to providers increased, at least by a meaningful percentage of the inflation adjustment.

Providers should also use clinically integrated networks to address pre-acute, acute and post-acute status of Medicaid beneficiaries. In addition, beneficiary-specific data must be used to identify and effectively manage individuals with chronic conditions to avoid the costliest services.

Social determinants of health may be identified and incorporated into care plans by CINs in order to drive down costs attributable to potentially avoidable episodes of care. Similarly, under sub-capitation or bundled payments, health systems should look to more proactively reduce potentially preventable readmissions for the Medicaid population.

Rural hospitals must seek to "right size" in order to deliver the level of care that can be supported by the communities they serve. It's relatively easy to identify the most financially vulnerable hospitals and overlay Medicaid utilization to assess access to care issues of concern to both states and CMS. Rural hospitals in financially vulnerable situations should reach out to state leaders to immediately address scope of services, access to care and other issues to position themselves for anticipated constriction in Medicaid reimbursement attributable to federal capitation.

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