Former U.S. Medicaid CMO: State’s actions to curb costs will backfire

The U.S. government projects that health care costs will continue to grow faster than GDP. | Courtesy of the Centers for Medicare & Medicaid Services

Changes to Kentucky’s Medicaid program, including the implementation of a work and community engagement requirement, redistribution of money and a proposal to reduce the number of managed care organizations will backfire, said Dr. Andrey Ostrovsky, the chief medical officer for U.S. Center for Medicaid and CHIP Services in 2016 and 2017.

Ostrovsky told Insider that such efforts are “misguided. … Ultimately, (they) will increase costs.”

In the long run, Kentucky taxpayers will incur greater costs and see more of their fellow Kentuckians with more severe health problems, he said.

Changes the state already has made to its Medicaid program have contributed to fiscal problems at Passport Health Plan, a Louisville-based nonprofit that administers Medicaid for more than 300,000 Kentuckians, two-thirds of whom live in the Louisville area. The state legislature is poised this year to consider additional changes to reduce costs.

Dr. Andrey Ostrovsky

The steps reflect a growing urgency by fiscally constrained states to curb the rising health care costs for the nation’s poor.

Medicaid spending reached $582 billion in 2017, according to the Centers for Medicare & Medicaid Services, with costs projected to increase 5.8 percent annually through 2026, primarily because of an increasing share of aged and disabled enrollees.

That means Medicaid spending is projected to grow at a faster rate than gross domestic product and take up an ever-growing share of state and federal spending.

The Society of Actuaries in a 2017 report identified “the continuing pressure on state budgets” as one element that was sure to affect the number of dollars flowing to managed care organizations such as Passport.

“Health care trends are moderating, but health care costs continue to grow at a rate faster than overall inflation,” the society wrote. “Medicaid is a significant and growing portion of all state budgets, accounting for about 15 percent of state spending in state fiscal year 2013. States with Medicaid managed care programs are likely to pass along budget reductions to (managed care organizations) in the form of reduced capitation rates, which may lead to insufficient margins.”

More dollars for care?

Note: In fiscal 2016, the managed care organizations had to exceed a rate of 85 percent, in 2017 it was 90 percent. Passport, the only nonprofit among the five, lost money in both years. All other managed care organizations were profitable overall, but it is unclear whether they earned a profit from their Kentucky Medicaid business. | Graphic by Boris Ladwig

Kentucky for fiscal 2017 had increased the share of the Medicaid dollars that have to go to recipients to 90 percent, up from 85 percent, meaning the share of dollars that managed care organizations can use for overhead and profit/risk decreased from 15 percent to 10 percent.

Carol Steckel

Carol Steckel, the commissioner of the Kentucky Department for Medicaid Services, told Insider via email that increasing the share to 90 percent required managed care organizations “to operate their administrative costs efficiently and to spend the payments they receive from the state on services for the Medicaid beneficiaries.

“This is the purpose of Medicaid,” she said.

However, Ostrovsky said margins for managed care organizations generally are in the low single digits and may be even lower for local nonprofit providers such as Passport. That means cutting the rate even by 5 percentage points can easily mean the difference between operating with a surplus or a loss.

When a managed care organization folds, it often leads to a significant disruption of care for a lot of the clients, who have to find a new managed care organization and potentially new health care providers, Ostrovsky said. Generally, that process is not as smooth as people think and can negatively affect health outcomes.

In addition, he said, the managed care organizations need to be able to use some of their money to improve their operations and health outcomes, which is less likely to happen if they continue to operate with a bare-bones budget.

Ostrovsky recently was named chief medical officer and senior vice president of behavioral health for Phoenix-based health care startup Solera Health.

He said that much like the state’s recent implementation of a work and community engagement requirement, the changes to the funding mechanism may initially curtail spending but cost more in the long run.

Such steps, Ostrovsky said, lead to fewer people having health insurance, which means that they will delay care until their conditions deteriorate to the point that they require emergency intervention, which is most expensive care. In addition, the patients then probably will not be able to pay for the care, which means hospitals will pass the cost of that care onto other patients, insurance companies and the state.

A state spokesman told Insider via email that changes the state is implementing to its Medicaid program do not have a work requirement but a “community engagement component … (that) includes employment and employment-related activities … (but also) volunteering, job training, education, substance use disorder treatment, caregiving and other similar activities.”

The state’s new approach “is not a one-size-fits-all program,” he said. “The primary purpose of community engagement is not to save money, although it is likely that it will create more sustainability; the purpose of community engagement, as well as other (program) components, is to improve health outcomes.”

Fewer managed care organizations?

State lawmakers this year are likely to discuss further changes to Kentucky’s Medicaid program. For example, a state legislator has proposed reducing the number of managed care organizations in Kentucky from five to three to improve the system’s financial efficiency, according to a story in Business First.

Besides Passport, the state contracts for Medicaid services with Aetna, Anthem, WellCare and Humana.

Steckel, the Medicaid commissioner, told Insider that a reduction of managed care organizations “reduces the administrative burdens on providers and the Medicaid agency, thus allowing for more resources to be utilized for health care services.

“One of the biggest complaints we get from Medicaid providers is the complexity of dealing with five MCOs,” she said.

David Stanley, the chief financial officer of Passport Health Plan, told Insider that for the state and medical providers, it may make sense to reduce the number of managed care organizations.

If Kentucky reduced the number from five to three, for instance, hospitals would have only three sets of rules to follow when filing claims, instead of five. At the same time, the remaining organizations could spread their fixed costs over a larger number of clients.

However, Stanley said that he was not sure whether the best number would be seven, five or three.

“I don’t know what the magic number there is,” he said.

Ostrovsky warned that reducing the number of managed care organizations also would lower competition, which could be detrimental to Medicaid beneficiaries.

“Competition in the market is critical to making sure clients get the best behavior out of payers,” he said.