Fifth Article in The House of Medicaid Series
As the U.S. House of Representatives returns from its District Work Period, its top priority will be to assemble its budget reconciliation package. The House Budget Resolution has charged the Committee on Energy and Commerce to produce $880 billion in savings over the next 10 years. The Congressional Budget Office (CBO), the nonpartisan scorekeeper for Congress, has informed leadership and members this level of savings cannot be achieved without reductions in spending levels to the Medicaid program.
The Five Pillars
Medicaid, along with all forms of health-insurance products, can be organized and visualized according to the following five pillars:
Eligibility
Benefits
Service Delivery
Financing
Administration
The challenge for Brett Guthrie (KY-02), Chairman of the House Energy and Commerce Committee, will be to find savings among the pillars without causing the House of Medicaid to collapse. The $880 billion target is equal to the total Medicaid expenditures in FY 2023. This series will examine each of the five, focusing on 2030, the mid-point in the 10-year budget window.
The Role of Administration
The Administrative level is where the battle against fraud, waste, and abuse is waged. Unfortunately, it generally does not receive the attention it deserves. As previously discussed, Medicaid is the most complex program in the American health insurance system regarding eligibility and benefits. States must communicate not only with CMS but also with other states and Medicare.
State procurements of technology and expertise are still largely based on the least costly bidder. There has been consolidation of IT vendors, which often results in states competing against each other for “A” team talent. As Medicaid approaches its 60th birthday, the administrative environment demands creative and fresh thinking.
The Cost of Administration
According to the Medicaid and CHIP Payment and Access Commission (MACPAC), the federal government and states collectively spent $35.2 billion in FY 2023 or about 4% of total spending on administrative costs.[1] For some perspective, this is twice the cost of the Temporary Assistance for Needy Families (TANF) program. The base discretionary funding for the Department of Justice was $37.6 billion in 2023; the National Aeronautics and Space Administration (NASA) was $25.4 billion; the Department of Interior was $17.0 billion; and the Department of Commerce was $11.2 billion.[2]
According to the CBO, the federal share for administrative costs in 2023 was $21 billion, and it is projected that the federal share of administrative costs will increase to $27 billion in 2030.[3]
With some exceptions, administrative costs are evenly distributed 50/50 between the federal government and the states. For example, the federal government will pay 90% of the cost for the design and development of automated IT systems and 75% of the costs for skilled medical professionals, medical and utilization reviews, facility surveys and certification, and Medicaid Fraud Control Unit (MFCU) operations.
Section 1903(a) requires states to operate “such mechanized claims processing and information retrieval systems as the Secretary determines are likely to provide more efficient, economical, and effective administration of the plan and to be compatible with the claims processing and information retrieval systems utilized in the administration of title XVIII” (Medicare). States are required to maintain a unified Medicaid Enterprise System (MES) consisting of two large Information Technology (IT) systems: the Medicaid Management Information System (MMIS) and the Enrollment and Eligibility System (E&E). In 2023, total spending on MMIS was $5.4 billion, and total spending on E&E was $8.5 billion. The majority of states contract for these systems, which must be certified by the Centers for Medicare & Medicaid Services (CMS).
MES modules typically include[4]:
Eligibility and Enrollment (online application, verification, and renewal)
Claims processing
Financial management (provider payments, capitation payments, and drug rebates)
Decision support/data (data analytics and reporting)
Encounter processing (managed care encounter data reporting)
Long-term services and supports (home and community-based services, waiver enrollment, person-centered plans, and grievance tracking)
Member management (managed care enrollment, enrollee information)
Prescription drug monitoring program (prescribing history, provider workflow integration)
Provider management (provider screening and enrollment, provider communications, and network adequacy)
Third-party liability (collection of information, electronic data exchanges, cost avoidance and recovery)
Program integrity (claims validation, recoupments, improper payment recoveries)
Health Information Exchange (patient identification, data standards, and security)
Cost of Managed Care Administration
CBO also projects that the federal share of the cost of Medicaid managed care will reach $353 billion in 2030. Managed care plans must perform all of the same administrative functions described above. The administrative costs projected by CBO described above do not include the administrative costs incurred by Medicaid Managed Care Organizations (MMCOs) which the federal government funds at a state’s regular match rate.
Federal law requires states to establish a minimum Medical Loss Ratio (MLR) of 85%. In a January 2022 IssueBrief, MACPAC reported that, “[o]ver the past five calendar years, Milliman has estimated the aggregate Medicaid MLR to range from 86.9 percent in CY 2016 to 88.6 percent in CY 2019. Prior to CY 2020, 85 to 90 percent of the MCOs included in the analysis were estimated to have an MLR at or above 85 percent each year …”.[5] Taxes and profits are included in the administrative costs of an MCO. Thus, assuming that just 5 percent of payments to MMCOs would have been incurred by the states, then Medicaid will spend another $17.65 billion on administrative costs in 2030.
Other Program Management Functions
According to the MACPAC report on administrative costs, the federal government and states spent $21.2 billion (60.2% of total costs) on management functions not included in the MES. These include staff costs related to day-to-day operations of program management.
Thus, the real administrative costs of the Medicaid program, when counting the costs of the operations of managed care organizations, will exceed $55 billion in 2030.
Too Much or Too Little?
The discussion of the administrative costs of Medicaid must go beyond simply reciting the dollars spent by function. The fundamental question is, “Is the cost too much or too little?” The corollary question is, “Are the federal government and states getting the outcomes they expect from their investment in these systems and program management?”
As previously discussed, the investments in the automated systems for determining eligibility and adjudicating claims totals under MES are approximately $13.9 billion. Despite the investment, the Government Accountability Office (GAO) estimates that the improper payment rate for Medicaid in 2024 was $34 billion.[6] An improper payment is a payment that should not have been made or was made in the incorrect amount. Would additional investments in program integrity result in a greater return on investment?
Administrative Simplification
As Congress has made changes to Title XIX of the Social Security Act (Medicaid) over the years, it simply adds another layer to the existing layers. Rather than increasing the cost of administering the Medicaid program, it may be time to consider the best approach for reducing at least some of the cost through administrative simplification. A few examples follow.
Home and Community-Based Services (HCBS) Waivers
The story of Medicaid Home and Community-Based Services (HCBS) begins with a baby girl named Katie Beckett from Iowa who was born with significant physical and developmental challenges. After Iowa Medicaid explained that Medicaid would pay for the cost of her care if they would place her in an institution, her mother, Julie, who was a nurse, wrote a letter to her congressman, which eventually made it into the hands of President Ronald Reagan. As a result, the Omnibus Reconciliation Act of 1981 created a waiver program to allow states the option of paying for care at home.
CBO estimates that the federal share of HCBS services will increase to $113 billion in 2030 or about 16% of Medicaid benefits. Most of these funds will be spent through Section 1915(c) waiver authority. Such waivers require significant administrative support to justify their very existence. Waivers must be renewed; waivers for the elderly must be separate from waivers for people with developmental disabilities; and states must prove they are “cost-effective,” creating extra work at the federal and state levels.
According to a research brief, “Trends in Users and Expenditures for Home and Community-Based Services as a Share of Total Medicaid LTSS Users and Expenditures, 2022,” prepared by Mathematic under contract with CMS, the number of HCBS users has increased to 7.8 million people compared to 1.5 million people served in institutional settings. “People who received institutional services continued to have much higher average expenditures ($48,143 per user) than people who received HCBS ($16,491).”[7]
There are currently more than 250 HCBS waivers. Nearly every state has at least one 1915(c) waiver; Connecticut currently has ten.
After more than 40 years of HCBS experience, it is time to reorganize Title XIX to eliminate the need for waivers and simply allow states to administer these vital services through the state plan.
Managed Care Waivers
By definition, a waiver is a request from a state to not comply with a federal rule. Medicaid requires states to allow beneficiaries to have “freedom of choice” of any Medicaid-enrolled provider. Benefits must be “comparable” across all beneficiaries. And the rules must apply uniformly “statewide.” All three of these provisions are routinely waived under 1915(b) authority.
About half of the states now use managed care for long-term services and supports (MLTSS). Historically, mental health services were “carved out” of managed care. States now realize how vital it is to have mental health services integrated with physical health services. There is a state option to require Medicaid recipients to enroll in a managed care plan under state plan authority. However, the majority of managed care is still provided under 1915(b) authority. Certain populations are excluded by law from being required to participate in managed care. States understand that the people who are least capable of navigating the “system” will benefit most from case management.
Managed care now accounts for nearly half of all Medicaid spending. It is time to move beyond waivers. Title XIX should be reorganized to eliminate the need for managed care waivers. A new managed care section would provide states with new tools to modernize their Medicaid programs, including services such as transitional care coordination to better support healing at home after a hospitalization; shared savings with providers for performance-based outcomes; and support for a full continuum of care for people with mental illness.
Too Much or Too Little?
Medicaid absorbs an unknown amount of hidden costs due to the lack of timely access to care. The excess cost of care occurs when there is over-utilization of services and under-utilization of services. Payment integrity depends upon program integrity, which starts with a sound and adequately funded administrative structure. Significant opportunities can be realized with a fresh approach to how Medicaid is administered.
HORNE’s Team of Medicaid and Integrity Experts
HORNE is a professional services firm founded on the cornerstone of public accounting. Our CPA heritage brings trust and discipline to our brand. HORNE was founded in 1962, three years before the Social Security Amendments of 1965 were signed into law, establishing both Medicare and Medicaid. Our founders, realizing the magnitude and complexity of this legislation to the American people and our Country, dedicated our Firm to be knowledge leaders and flag bearers for integrity and transparency for federal and state governments and providers alike.
Our over 60 years of expertise in auditing throughout the healthcare industry positions us perfectly to serve as a partner to state Medicaid departments and agencies in reducing fraud, waste and abuse through improper payments and other areas of risk.
Citations
- [1] Medicaid Expenditures
- [2] Budget of the United States Goverment Table S-8
- [3] Congressional Budget Office
- [4] Department of Health and Human Services
- [5] MACPAC
- [6] GAO
- [7] CMS
