Guest Commentary: Why the Medicaid payment model is shifting

Guest post by Dan Mendelson

Across the nation, states are at an inflection point on Medicaid policy. States face tremendous fiscal strain due to persistent revenue shortfalls, increased costs in entitlement programs, and new responsibilities under the Affordable Care Act (ACA). Still, each state has a vulnerable population that needs a robust Medicaid program focused on delivering quality care at costs the state can afford. As states grapple with this dilemma, many are turning to a promising, but somewhat controversial solution--managed care.

Twenty states have proposed Medicaid managed care expansions since late 2010. According to our own estimates, 23 million of the 49.5 million eligible beneficiaries are presently enrolled in fully capitated managed care programs. If legislative proposals under consideration are enacted over the next few years, we will see an additional 9.5 million Medicaid beneficiaries shifting into managed care plans -- meaning that Medicaid managed care enrollment would expand from about 47 percent today to more than 65 percent in the next several years.

So why are states looking to managed care?

First, the programs offer predictability in state budgeting. Unlike the federal government, most states have constitutional requirements to balance their budgets annually. To do so, states need predictability over their costs. Managed care contracts enable states to have fixed annual costs on a per capita basis. States that shift all enrollees into managed care may be able to eliminate certain management functions, like setting the preferred drug list and managing prior authorization processes. And at the same time, states also are putting quality requirements in contracts with managed care companies, and in some cases paying on the basis of quality.

Several states are shifting prescription drug management into managed care--integrating all services under a single plan. Two states that previously excluded prescription drugs from managed care contracts are reconsidering their actions. On Oct. 1, New York reversed its prescription drug carve-out, bringing 2.9 million beneficiaries into the system. Ohio also has approved plans to reverse its prescription drug carve-out, moving drug benefits for almost 1.4 million beneficiaries into managed care.

Again, it is important to ask why after controlling drug purchasing themselves, are some states looking to managed care solutions? As a result of the ACA, states are now able to collect Medicaid rebates from managed care plans, whereas previously rebates were only available for beneficiaries purchasing drugs through fee-for-service. Furthermore, some believe that managed care plans, and the pharmacy benefit management companies (PBMs) they work with are better able to manage the utilization of prescription drugs than the states. And some states believe they can negotiate better supplemental rebate agreements by maintaining consolidated purchasing power for all drugs--10 states continue to carve-out their drugs from managed care contracts. But all are actively evaluating the issue to assess whether costs can be reduced and quality enhanced by outside managers.

Managed care solutions are not always a smooth path for governors. Implementing managed care programs, particularly for the elderly, disabled, and people living in rural areas, remains a challenge. Ensuring access to services and contracting with providers--who often have issues with Medicaid reimbursement to begin with--has been a barrier in the past to expanding managed care to these groups. Culturally, it can be difficult for state legislators and regulators to accept the idea of working with public companies where senior executives are highly compensated. And oversight and audit of managed care operations becomes critically important to making sure that Medicaid beneficiaries get what they need.

Nonetheless, the clock is ticking for many states as they struggle to balance their budgets. State Medicaid programs do not have the luxury of waiting to see if changes in the delivery system will succeed. With states at a critical inflection point in dealing with Medicaid policy, managed care continues to surface as an attractive option.

Dan Mendelson is CEO and founder of Avalere Health, a Washington, D.C.-based healthcare consulting firm.