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How Budget Pressures Are Pushing States to Privatize Medicaid

Eric Pianin
How Private Insurers Rip Off Medicare Advantage for Billions of Dollars

Last year, the federal government spent $576 billion on Medicaid coverage, and that total is projected to steadily rise in the coming years. Knowing that budget cuts are likely, the pressure is on the states that are responsible for managing their Medicaid programs to find ways to lower their costs.

One way to do that is by changing from a fee-for-service healthcare model to a managed care system. Today, 42 states have privately managed Medicaid, and 73 percent of the 81 million beneficiaries are now covered by private managed-care health plans, according to Price Waterhouse Cooper (PWC). By comparison, just 55 percent of beneficiaries were in managed care programs in 2012.

“Overall, things are going pretty well, as evidence by the fact that more and more states seem to add private coverage options, and states that already have it continue to expand the share of the population that is actually eligible for private coverage,” said Ari Gottlieb, a health care industry analyst with PwC.

“There are always some challenges,” he added, noting that states frequently missed their start-up schedules and insurers and health care providers lost money in the early going. “That said, there are not a lot of states moving in the other direction.” But it’s not always a slam dunk to make that switch.

Related: Why the GOP Plan for Medicaid Could Be a Bad Deal for the States

Alabama officials stumbled recently in their effort to join most other states in privatizing their Medicaid coverage for the poor and disabled. Their mishaps offer a cautionary tale of some of the budgetary challenges facing state officials down the road if the Trump administration and Congress succeed in sharply reducing federal assistance for the massive health care program.

Alabama legislators and Republican Gov. Robert Bentley had been pushing for several years to replace their state’s traditional Medicaid fee-for-service system with a managed care system that would force hospitals and doctors to deliver services to the poor and elderly within fixed per-capita costs, or absorb the financial losses.

More than 650,000 of the state’s one million Medicaid recipients would receive care through this approach. But Alabama couldn’t raise enough up-front funding to organize and launch the program last April. The Centers for Medicare & Medicaid Services offered as much as $748 million over five years to help launch the pilot project, but it wasn’t enough.  

Anxious to keep the project alive, officials say they will begin enrolling beneficiaries into managed care by October 1. CMS responded in a March 30 letter approving the delay but is insisting on onsite inspections before allowing Alabama officials to move ahead.

Related: With Medicaid Costs Soaring, Republicans Plan Dramatic Eligibility Changes

Modern Healthcare says Alabama’s start-up snafus come on the heels of widespread problems in Iowa’s Medicaid managed-care program since it was launched early in 2016. Former Republican governor Terry E. Brandstad rushed through a fundamental transformation of the state’s traditional Medicaid program to a private managed-care model a year ago, before he left office to become U.S. ambassador to China.

Brandstad insisted the new approach would save the state money. Instead, critics complain about inadequate patient access to health care, shoddy administration and revenue shortfalls for three insurers who are now demanding that the state assume more of the risk. A Des Moines Register editorial from April 1 described the state’s ongoing “ordeal” with managed care as “an April Fool’s joke with no end.”

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