Medicaid programs cannot run on autopilot for long before growth in expenditures exceeds the growth in tax revenue. To keep your Medicaid program on track: 1) diagnose the underlying problems causing high growth rates, 2) choose methods of reform that address those problems, 3) implement reforms, 4) monitor the results of the reforms, and 5) fine tune your policies to make midcourse corrections.

In the past few years, with a booming economy, cost saving often took a back seat to expanding coverage for low-income children. Now that the economy has taken a turn for the worse, States find themselves caught with a growing number of Medicaid recipients, rapidly growing expenditures and insufficient tax-revenue to keep up with the growth. Since Medicaid costs are often 10 to 20 percent of the State’s total budget, limiting the growth of Medicaid is usually a primary tool for balancing the budget.

Diagnosis

The first step in diagnosis is getting a thorough understanding of your expenditure history. In addition to looking at graphs and tables showing trends in Medicaid expenditures, you must understand the policy, economic and other forces that contributed to those trends. For example, a sudden increase in dental expenditures would be a good thing, if it was in response to policies designed to increase access to dental care.

Utilization, price, enrollment, demographics and mix of services determine fee-for-service expenditures. You need to know which of these factors are causing your cost increases, so you can determine which policy changes will result in the intended change. For example, if your drug costs are skyrocketing, reducing the price you pay for all drugs by 5% would reduce your expenditures for drugs, but after the initial price change, it would not reduce the rate at which your drug expenditures are growing. Whereas creating a drug formulary can alter both the cost and the mix of prescriptions, resulting in lower costs now and lower growth for years to come.

Some of the same factors affect capitated managed care, as well as fee-for-service, since the managed care organizations’ spending ultimately gets passed on to the State in the form of higher rates. Policy changes to fee-for-service can have indirect effects on capitation rates. Furthermore, data comparing managed care and fee-for-service utilization for similar populations helps you understand how well managed care organizations are managing care and helps you negotiate better rates.

Treatment Plan (Reform Methods)

According to a study for the Kaiser Commission on Medicaid and the Uninsured, pharmacy costs are the number one cost driver for 36 Medicaid programs. According to a study by National Institute for Health Care Management Research and Educational Foundation national spending on pharmaceuticals increased 17 percent in 2001, mostly because of increased sales for the top 50 drugs. These top drugs are the ones featured in direct-to-consumer and doctor advertising.

The New York Times reported that state legislators in 37 states are considering bills to help curb the growing costs of prescriptions drugs. And Medicaid programs are introducing many reforms including introducing or refining formularies, copayments, or price caps, purchasing drugs directly, taking a larger discount off of Average Wholesale Price (AWP), reducing dispensing fees, and starting mail order programs.

Fraud detection, prevention and recovery is another popular area for reform. With fraud estimates in healthcare at 10 to 20 percent or perhaps even higher, this is a prime target for reform. Curtailing fraud lets a program save money without cutting reimbursement, services or eligibility.

Other reform options include:

• Service limits of abused and/or optional services
• Price adjustments
• Patient and provider education
• Copayments and better enforcement of collection of copayments
• Job training and placement
• Tax incentives for employers to provide insurance coverage and employees to purchase it
• Subsidized insurance options for low-income and small businesses
• Fraud detection, prevention and recovery for managed care

Considering the economic situation, states will probably be targeting multiple areas for reform to try to balance state budgets.

The Intervention (Implement Reforms)

Some reforms are easier to implement than others. Administrative changes are easier than legislative changes. Strong lobbying groups may make it difficult to reform certain types of service. Lawsuits can delay reforms by years. System changes can get lost in competing priorities.
There may be many hurdles to cross before reforms can be implemented, so states need to adjust their savings estimates to fit into realistic goals for implementing reforms.

Follow-up (Monitor the Results)

Measuring the results are vital to monitoring the economic health of your program. You need to know if reforms are meeting your goals. For example, when Indiana implemented a tiered copayment with a higher copay for brandname than generics, we expected most of the savings to come from a shift to using more generic drugs. Instead, we soon realized that many pharmacies were not collecting the copayments, so they could continue dispensing more expensive drugs.

You also need to know if there are any unexpected shifts in services. When Indiana implemented payment reforms for inpatient and outpatient hospital care, we were concerned with how much outpatient expenditures dropped. If outpatient payments were cut too much in comparison to inpatient, there might be shifts from outpatient to inpatient, resulting in inefficiency.

Keeping in Shape (Making Midcourse Corrections)

Keep reforming. Part of reform is getting providers to change their practice to fit with new economic incentives, but you need to make sure the incentives are the ones you intended. If they aren’t, revise the rules to achieve the outcome you want.

Given enough time providers learn how to take advantage of loopholes in your system. If you take away easy ways to make money, dishonest providers will move to new areas, new procedures and new gimmicks to find ways to work less and make more. Fraud deterrence and detection are never ending jobs.