In November 2011, 560,000 Kentucky citizens were placed in a new Medicaid managed care program. In January 2014 they will be joined by approximately 300,000 more Kentuckians who will become Medicaid eligible under the Affordable Care Act, or “ObamaCare.”
The federal government currently pays approximately 70 percent of the cost for Kentucky’s Medicaid program. It will pay 100 percent of the costs for these 300,000 new Medicaid recipients for the first three years, tapering off to 90 percent by 2019.
This represents a tremendous influx of federal money into Kentucky. Governor Steve Beshear’s office predicts that January’s expansion of Medicaid will have a $15.6 billion positive economic impact and create 17,000 new jobs in Kentucky by 2021. Many fear, however, that the state which already has trouble coming up with its 30 percent match, will really be behind the eight ball when the federal government begins reducing its funding on these new recipients. Kentucky has three years to take advantage of this federal largesse to get its Medicaid house in order. Unfortunately, history and the present state of affairs do not look hopeful for that happening.
Kentucky’s Medicaid Program has long been underfunded. Fifteen years ago the Medicaid program’s attempt to convert from a fee-for-service model to managed care failed largely because populations were not dense enough to sustain managed care plans in rural areas. After initial difficulties, however, Medicaid managed care became successful in Louisville where several large hospital systems formed a partnership in the form of the non-profit, Passport Health Plan. Though, Passport came under fire from the state auditor in 2010 for spending procedures.
To be successful managed care must be a partnership between health care providers and managed care organizations (MCOs). The present effort to take the rest of the state outside the Louisville region to managed care is not, however, a partnership of providers and MCOs. It is more like a war of attrition. It was born out of attempt to plug a hole in the state budget created when $165 million in state Medicaid dollars for Fiscal Year 2012 were taken to balance the FY2011 budget.
Contracts were quickly let to three, for-profit MCOs to form managed care networks at break-neck speeds. On paper these deals saved the Medicaid Program $325 million per year. But the capitated rates between the state and the MCOs were not actuarially sound as required by federal law. Historically Medicaid has paid hospitals approximately 82 percent of their costs. The MCOs, which expect to pay only 82 percent of their receipts to providers, bid rates that were less than the already inadequate rates paid by the state to providers. There was no way the MCOs could pay providers decent rates, manage the health of their Medicaid members, and still maintain their own profit margins.
Problems arose immediately as the MCOs scrambled to cobble together provider networks in record time. One MCO, Kentucky Spirit owned by Centene Corp., which initially chortled to its investors about expected profits from the addition of 180,700 new lives in Kentucky, soon saw its diluted earnings per share drop like a rock from projections of $2.64 to $2.84/share to $0.07 by the third quarter of 2012. It is now suing the state to get out of its contract.
Another insurer, Coventry Cares, began cancelling provider contracts almost immediately, complaining the state gave it bad data and was not enforcing network adequacy standards uniformly. The federal court in Lexington subsequently issued an injunction to prevent Coventry from, in the words of the court, “throwing its members under the bus” while it carried on its dispute with the state and its war on providers. Much of the projected savings from managed care soon evaporated as Coventry and the third MCO, WellCare Health Plans, were given 8 percent rate increases last January to keep them in the state. An analyst who reviewed the state’s bidding process had predicted that once the MCOs got their foot in the door they would squeeze the state for more money in this manner.
Kentucky has long suffered from physician shortages. To help relieve this problem Kentucky Medicaid paid Primary Care Centers (PCCs) enhanced rates to encourage physicians to locate in underserved areas. The MCO contracts negotiated by the state failed, however, to maintain these payments. Effective February 1, 2013, CMS made the state discontinue supplemental payments to PCCs, putting many of them at risk, further exacerbating the physician shortage.
Unfortunately, the foundation for a successful Medicaid managed care program has not been laid in the rest of the state outside of the Louisville region. Managed care is not a quick solution for budgetary problems. It takes time to establish partnerships and to implement programs that change behaviors and improve the health and wellbeing of Medicaid populations. The sudden influx of more federal funds next January may temporarily mask current problems. But unless serious structural deficiencies are corrected, the long-term prognosis for Medicaid managed care and, indeed, the health of the state’s health care system as it affects all of us, is not good. The state and the Centers for Medicare and Medicaid Services – the federal agency charged with oversight of state Medicaid programs – would be wise to take a step back and examine what made Passport a success in Louisville and consider whether that success could be replicated in the rest of the state.
Stephen R. Price, a partner in the law firm of Wyatt, Tarrant & Combs, LLP, advises and litigates for health care clients in areas relating to government regulations and reimbursements.