Threat of Medicaid cuts weighs on outlook for safety-net providers

It’s budget season in most states, meaning safety-net hospitals are anxiously waiting to hear whether their Medicaid payments will be cut.

The concerns regarding Medicaid reimbursement reductions are greater given the pandemic-related threat of an economic downturn, which generally translates to more people being added to the program when tax revenue may be falling.

“It’s this perfect storm that leads to states having to make some very difficult decisions,” said Matt Salo, executive director of the National Association of Medicaid Directors, who saw this pattern play out during the Great Recession of 2008 and the 2001 recession.

On a net basis, states lost $13.6 billion in Medicaid revenue comparing the periods of April through December in 2019 and 2020, in order to estimate the effects of the pandemic, according to the Urban Institute.

That sizable revenue loss is smaller, though, than what some expected. “The budget outlook looks a lot better than we thought it would, although there are certainly states with big revenue deficits,” Salo said.

This time around, states that rely heavily on tourism and oil and gas have seen much of the revenue declines. For instance, Alaska’s revenue fell by 41.4%, Florida’s by 11.3%, Texas’ by 10.4% and New York’s by 4.1%, according to the Urban Institute.

Meanwhile, 22 states collected more revenue during the pandemic months of 2020 (April-December) than they did during the same period in 2019, ranging from a 0.1% increase in Maryland to a 10.4% increase in Idaho.

Experts credit federal stimulus money, including unemployment supplement payments, with shoring up consumer spending and associated sales taxes. The 6.2% enhanced federal Medicaid match known as the federal medical assistance percentage, or FMAP, is also helping.

In addition, many states took advantage of risk corridors to carve back dollars from Medicaid managed-care plans when utilization fell dramatically due to COVID. These dollars helped some states, such as Michigan, cover COVID-related losses.

Hospitals and other providers should not be shy if they want to influence state decisions related to Medicaid rates. Shawn Stack, director of perspectives and analysis at the Healthcare Financial Management Association, recommends having a dialogue with state policymakers. “Engagement is important, not only to contest Medicaid cuts, but to educate policy folks on what is happening real-time, both positively and negatively, in the healthcare community,” he said.

One topic of discussion: the financial challenges that Medicaid providers face. Safety-net hospitals were already operating on relatively low margins prior to COVID-19. The aggregate 2018 operating margin was 2.5% among the 300 members of America’s Essential Hospitals, while hospitals nationwide had a 7.6% aggregate operating margin in 2018.

At Henry Ford Hospital in Detroit, the percentage of Medicaid patients rose from 23.5% in 2019 to 25% in 2020, part of a 2 percentage-point shift from commercial to Medicaid and uninsured. (Across Henry Ford Health System, 20% of patients are enrolled in Medicaid.)

This shift contributed to greater Medicaid losses. In 2019, the cost of caring for Medicaid patients across Henry Ford was $135 million more than the system received in Medicaid payments. In 2020, the cost-to-reimbursement difference rose to $166 million, an increase of 23%.

“We had a lot more Medicaid patients in inpatient beds with high acuity due to COVID because vulnerable populations have been disproportionately impacted by COVID,” said Robin Damschroder, Henry Ford’s executive vice president and chief financial officer.

The health system relies on disproportionate-share supplemental payments and 340B drug program reimbursement to cover part of its Medicaid losses. Being a large health system with its own health plan and a diverse payer mix also gives Henry Ford flexibility in managing its finances.

“We are an integrated delivery system, which is a very efficient way to coordinate care,” Damschroder said. “There are programs like Medicaid where we are going to lose money, and traditionally the commercial programs help balance out those losses.”

In fiscal 2020 and 2021, Michigan hospitals benefited from Medicaid outpatient rate increases. Henry Ford’s 2020 average Medicaid outpatient rate increased 8.8% compared with the prior year. The governor’s draft budget for fiscal 2022 does not mention any Medicaid cuts.

In contrast, providers in other states had to absorb Medicaid cuts over the past year and are preparing for additional cuts. New York, for example, issued a 1.5% across-the-board Medicaid rate reduction in fiscal 2021, which ends March 31, and has included a 1% across-the-board reduction in its draft fiscal 2022 budget, although this may change after the state receives federal dollars from the American Rescue Plan Act.

“We get nervous about any cuts to funding, especially in Medicaid, which historically has paid less compared to Medicare and private insurance,” said Erin O’Malley, senior director of policy at America’s Essential Hospitals. “We see the low rates associated with the Medicaid program as a way of undervaluing the provision of care to Medicaid beneficiaries.”

Jon Swiatkowski, CFO at Erie County Medical Center in Buffalo, N.Y., believes policymakers need to create a more equitable reimbursement methodology.

“The problem is that our most vulnerable community members, our Medicaid patients, are underinsured,” he said. “That has created this two-tiered system where the same care provided to Medicaid patients that is provided to Medicare or commercial patients is paid at a significantly lower rate than Medicare or commercial payers pay.”

With 38% of its patients on Medicaid, Erie County Medical Center typically operates at or around break-even. “We believe that when you lead with quality, the finances will follow, but it’s been very challenging,” Swiatkowski said.

In 2020, the 573-bed hospital had to cut its capital budget in half and lay off 70 staff member to help cover Medicaid and COVID-19-related losses.

Swiatkowski is concerned that future Medicaid rate cuts may mean eliminating needed programs. For instance, Erie County Medical Center is one of the only dental providers for Medicaid enrollees in the area.

“Further cuts could jeopardize these types of programs both here and nationally, and it will be difficult for us to stand up new services that the community wants, such as a behavioral health intensive outpatient service,” Swiatkowski said.

Meanwhile, with 43% of its patients on Medicaid, University Medical Center of Southern Nevada, a public academic medical center in Las Vegas, also struggles to cover reimbursement shortfalls.

“Prior to COVID, we’ve been advocating to have Medicaid rates help cover the true costs of running a hospital,” said CEO Mason Van Houweling, who is also vice chair of the Nevada Hospital Association. “When you look at Medicaid reimbursement in Nevada compared to the cost of delivering care, it only covers about 71% of our costs. So it becomes very difficult when 43% of your business is not fully covered on true costs.”

Providers’ advocacy work paid off when Nevada issued a 2.5% Medicaid increase for medical-surgical services in December 2019, which raised UMC’s $1,500 per day payment to $1,538.

But then COVID hit, devastating Nevada’s tourism-dependent economy. The state had a 9.2% unemployment rate in December, second-highest in the country after Hawaii.

As a result, Nevada instituted a 6% across-the-board Medicaid rate reduction, effective Aug. 15, 2020, reducing UMC’s medical-surgical payment to $1,410 per day. In January, the governor released a proposed two-year budget that reverses the 6% Medicaid cuts; however, at deadline, it is unknown how the final budget will play out.

“It wouldn’t surprise us if there are more cuts on the horizon as the state is faced with balancing the budget,” Van Houweling said. “We certainly do not envy the job that the state and governor are faced with.”

HFMA’s Stack recommends healthcare leaders engage state policymakers about new care approaches, efficiencies, and technologies that are yielding cost savings or healthier outcomes for Medicaid members.

“State Medicaid agencies are concerned about their patient members and don’t want to cut rates unless they have to,” he said. “The agencies are usually willing to collaborate with hospitals to find creative ways not to cut those rates.”

Improving health equity for Medicaid patients is another critical topic that providers and states need to discuss. “States are very interested in social determinants of health and looking for ways to connect Medicaid patients to services that impact their health, such as employment or housing,” said Tom Betlach, a partner at Speire Healthcare Strategies. “They are engaging hospital partners to build alignment around that.”

In addition to discussions with state policymakers, Medicaid providers also need to start conversations with the Medicaid managed-care plans they contract with, Stack said. “Talk about, ‘How can we cut costs? How can we put in value-based initiatives or alternative payment models that focus on quality of care and cost savings? How can we team up to make this work?’ ”

Almost 70% Medicaid patients in the U.S. are enrolled in managed care. These plans are typically paid a capitated per-member-per-month rate by states. The plans then negotiate payments with providers, typically offering a certain percentage of the Medicaid fee-for-service rates that the state pays providers to care for patients not enrolled in managed care.

The adoption of risk-based provider payment in Medicaid has been slow. In the federal fiscal 2020, 24 states required Medicaid managed-care plans to have some percentage of provider contracts or enrolled members in alternative payment models. However, most arrangements were pay-for-performance structures to incentivize providers to perform well on quality metrics. The use of risk-based payment models, such as shared losses and capitation, is less common.

Salo, of the National Association of Medicaid Directors, would like to see states and Medicaid managed-care plans pick up the pace of value-based payment. “The pandemic has shown us the challenges associated with a pure fee-for-service, volume-based system,” he said. “If you were a physician who couldn’t see many patients for six months because of the pandemic, you could be going out of business.”

But some safety-net hospitals like Erie County Medical Center are not ready to take on care-management risk overnight.

“Safety-net providers like us don’t have the capital resources or funding to invest in the technology and population health infrastructures to manage patient populations and take on additional risk as quickly as we need to,” Swiatkowski said. “We need the funding and a longer runway.”

Maggie Van Dyke is a freelance writer based in Brookfield, Ill.