States face looming crisis over Medicaid growth, which could trigger changes for providers and payers

Dollar bill with a hole in Washington's face on it and the word "Medicaid" in its place
States are facing a looming budget crisis over Medicaid as enrollment grows due to staggering unemployment. (zimmytws/GettyImages)

States are about to face a major budget crisis due to exponential growth in Medicaid enrollment and a decline in tax revenue, which experts say could lead to provider payment cuts or other measures to contain costs.

Unemployment has been skyrocketing due to the COVID-19 pandemic, which will likely lead to an increase in the Medicaid rolls. With that comes increased costs for states, where Medicaid is the often the biggest budget item.

“Almost all of these state legislatures will see the biggest budget gap they have ever seen given the shutdown over the last few months,” said Chris Sloan, associate principal for consulting firm Avalere Health, during a webinar hosted by the firm. “States are going to be looking at both closing budget gaps due to the reduction in revenue and seeing increases in spending in their Medicaid rolls.”

That could lead states to a series of moves to contain costs or limit growth in Medicaid, Sloan said.

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States have used several methods in the past that could come back up, including limiting provider payment rates or even tightening drug formularies to downgrade utilization, he added.

States have to cover all drugs but they can install formulary management tools such as preferred drug lists or prior authorization. The cash crisis could continue a trend of states farming out their formularies to pharmacy benefit managers, Sloan said.

States will have to do what they can to economize via negotiations with managed care organizations and providers, said Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation.

States could try to be more efficient and limit items that are more discretionary, she added.

“But there is no easy solution, and there will be a world of hurt for Medicaid problems unless and until state fiscal well-being improves,” Hempstead said.

The extent of the impact on the budget could depend on whether the state expanded Medicaid under the Affordable Cart Act (ACA).

“You will see bigger Medicaid enrollment increases in states that have more generous Medicaid programs, whereas in some other states that don’t you may see a higher proportion go into the exchanges or the uninsured,” Sloan said.

There have been 14 states that have not expanded Medicaid under the ACA.

House Democrats have proposed new funding for states and localities in a massive $3 trillion stimulus bill that was expected to pass the House Friday. The bill would give nearly $1 trillion to state, local, territorial and tribal governments.

But the bill faces a major obstacle in the GOP-controlled Senate, where Republicans have panned it.

The bill, called the HEROES Act, also would increase the federal match for Medicaid. Currently, states get an additional 6.2% increase in payments from the federal government for Medicaid and the bill would increase that bump to 14%.

The increased federal matching rate would start on July 1 and extend through June 30, 2021, according to a summary from the National Health Law Program.

“We are in unprecedented times, and we need this unprecedented response,” the program said in the summary.

The Centers for Medicare & Medicaid Services (CMS) is also seeking to help states by offering waivers and regulatory flexibility. The agency released Thursday guidance for how states can temporarily modify provider payment methodology and capitation under a managed care contract.

The guidance lays out options that states can consider for their managed care contracts, including requiring managed care plans to temporarily boost their payments to providers.

“While some providers are experiencing surges in COVID-19 related utilization, other providers are experiencing dramatic declines in utilization and revenue,” CMS said.

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