Medicaid payments under threat as COVID pummels state budgets

Like many hospitals struggling to cope with the financial fallout of the COVID-19 pandemic, University Medical Center of Southern Nevada has made tough decisions and reevaluated its business strategy to survive.

The Las Vegas hospital has gotten federal relief funding, but “it’s just not enough” to offset increasing care costs and declining revenue, UMC CEO Mason Van Houweling said. The hospital’s fortunes are deeply intertwined with the state’s tourism-heavy economy, which has been hammered for the past six months as casinos shuttered, and conferences were canceled.

UMC’s supply budget has more than tripled since the outbreak began, and it recently offered voluntary buyouts to staff members to rein in its growing labor costs. It also curtailed investments in new capital projects over the next five to 10 years, even though its finances were on solid footing before the pandemic hit the U.S. The hospital reported $691 million in operating revenue and a total profit margin of 4.3% in fiscal 2019, according to a Modern Healthcare analysis of CMS cost reports.

Now reductions to Nevada’s Medicaid program threaten to cut UMC’s finances even closer to the bone. Nevada lawmakers agreed to a 6% across-the-board rate reduction during a special session in July to help close a $1.2 billion budget shortfall, saving the state $53 million, and with the loss of federal matching will cost providers more than $100 million. It’s the largest cut to Medicaid provider rates any state has made since the pandemic began and a massive blow to Nevada’s largest public hospital.

“The new proposed rate puts us back to 2001 levels,” Van Houweling said.

With Medicaid enrollment snowballing and tax revenue falling off a cliff thanks to the pandemic, many states are sharply reducing their Medicaid spending to balance their budgets.

“Nobody is going to be raising taxes in an economic downturn,” said Matt Salo, executive director of the National Association of Medicaid Directors.

In theory, states could limit benefits and eligibility, modify their Medicaid managed-care contracts or reduce provider payment rates to cut their Medicaid spending. But most states will turn to provider rate cuts to get their spending under control because of congressional limits on enhanced federal matching funds and the practical effects of curbing benefits or revisiting their Medicaid managed-care organization contracts. Experts said hospitals can expect lower Medicaid payment rates for the foreseeable future and should plan accordingly.

“It’s going to get ugly,” Salo said.

The situation could have been even more dire looking beyond 2021 had CMS moved forward with its controversial Medicaid fiscal accountability regulation, or MFAR, which would have cracked down on states that agency officials thought were gaming the state-federal Medicaid financing system to collect additional federal dollars. After significant backlash from the industry and state lawmakers, CMS pulled the plug on the rule last week. An analysis conducted for the American Hospital Association by Manatt Health, said the proposal could have cut total Medicaid funding by up to $49 billion annually or roughly 8% each year. Most experts said many states probably didn’t account for MFAR when budgeting for 2021 because the proposed rule’s exact impact was unclear. Forty-three states had begun their fiscal 2021 by Sept. 1.

The economic turmoil spawned by the pandemic is still the greatest menace to state Medicaid budgets, experts said. According to the progressive Center on Budget and Policy Priorities, states face average budget shortfalls of 10% in 2020 and 20% in 2021.

On average, states spend more than 20% of their own money on Medicaid, a National Association of State Budget Officers analysis found. Only elementary and secondary education make up a larger portion of states’ general funds at nearly 36%. The NASBO estimates federal and state Medicaid spending accounted for almost 30% of total state spending in 2018.

“When states face economic downturns, Medicaid is often one of the first programs on the chopping block,” said Erin O’Malley, senior director of policy for America’s Essential Hospitals.

Health Management Associates predicted in April that Medicaid enrollment could increase 25%, from 71 million people in December 2019 to 89 million people, by the end of 2020 depending on how the economy performed.

“We’re seeing a surge in Medicaid enrollment, and some states are seeing a lot more than others,” said Emily Blanford, health program principal for the National Conference of State Legislatures. “States are expecting that will continue into next year.”

The Families First Coronavirus Response Act temporarily raised Medicaid’s federal matching percentage—FMAP—by 6.2% until the public health emergency ends, granting states some much-needed fiscal relief. But states can’t curb eligibility, disenroll beneficiaries or raise premiums if they want the additional federal money. They also must cover all COVID-19 testing and treatment costs and can’t force local governments to pay a higher share of the state’s nonfederal Medicaid spending.

“All states are … dealing with the uncertainty of the duration of the public health emergency,” said Robin Rudowitz, co-director of the program on Medicaid and the Uninsured at the not-for-profit Kaiser Family Foundation. That’s making it more difficult for states to budget.

States could trim benefits to lower their Medicaid spending, but that might create more problems than it solves. Medicaid programs must cover inpatient and outpatient hospital services, physician services, laboratory and X-ray services and home health services, among other benefits. They can also choose to cover medical expenses like prescription drugs or community-based, long-term care services. But experts said many of Medicaid’s so-called optional benefits are critical to peoples’ health.

States are “really left with the things you can cut that aren’t going to result in people dying in the street” like adult dental and podiatry, Salo said. “There really isn’t a whole lot of money there,” he said.

Industry insiders said states might lower Medicaid managed-care organization spending by renegotiating rates or adding risk corridors to capitalize on the recent drop in healthcare utilization, which has provided a short-term boost to commercial insurers. But that might be a fool’s errand. Utilization is already starting to rebound, and it could force states back to the negotiating table to prevent their Medicaid managed-care organizations from going bust.

States may even delay “the expansion of services that have been in the pipeline,” O’Malley said. In June, Tennessee killed its long-planned postpartum insurance expansion to save Medicaid dollars.

Colorado, Nevada and Wyoming have made large, across-the-board rate cuts to respond quickly to the fiscal devastation wrought by the COVID-19 pandemic, and Florida’s governor vetoed a proposed rate increase. But states could adopt more targeted cuts in the next year or two to ensure the rate reductions are efficient and lower the risk of harming beneficiaries’ access to care. Experts worry hospitals could eventually stop participating in the program if states squeeze reimbursement rates too much and force providers to accept massive financial losses when they care for Medicaid beneficiaries.

“While (Medicaid) rates are typically well below Medicare rates, there are some states and some benefits levels that will be closer to Medicare rates or even equivalent … those providers might be able to weather a cut a little better than some other providers,” Blanford said.

Some states are giving safety-net providers retainer payments to ensure they can keep their doors open during the emergency period. But it will become increasingly challenging for states to make those payments if their budgets continue to shrink and the enhanced FMAP disappears.

“Once (safety-net providers) close, they close for good,” Salo said.

In the meantime, many providers will reduce service lines or focus on more profitable ones “that attract a more lucrative payer mix, where there’s a higher share of commercial payers (than) Medicaid payers,” Manatt Health partner Anne Karl said. That could reduce access for beneficiaries too.

“We’re focusing on six service lines … to help turn around the hospital,” Van Houweling said. UMC is investing in cardiology, surgical services like orthopedics, urgent and primary care, its children’s hospital and oncology. Nevada’s only safety-net hospital is still committed to its core mission. It’s just trying to make the numbers work.

Experts said the least painful option for states, beneficiaries and providers would be more fiscal relief from Congress. The House passed the Health and Economic Recovery Omnibus Emergency Solutions—HEROES—Act in May, which would increase FMAP from 6.2% to 14%, but the Senate hasn’t taken it up. The National Governors Association in July asked Congress to boost the enhanced federal match to 12% until at least September 2021.

“Given the magnitude of both the public health and economic crises the nation continues to face, state and local governments need more support to provide health care services to individuals and families,” the association wrote.