Medicaid Pay Cut in California Reflects National Trend

October 28, 2011

October 28, 2011 — State Medicaid programs are dealing with the loss of federal stimulus funds in the current fiscal year with their favorite belt-tightening move: cutting rates for physicians, hospitals, and nursing homes, according to a new survey by the Kaiser Family Foundation (KFF).

Case in point: the Centers for Medicare and Medicaid Services (CMS) yesterday approved a 10% pay cut for physicians and other providers sought by California's Medicaid program, called Medi-Cal.

Only one state — Alaska — is increasing Medicaid pay for physicians as state governments attempt to recover from a bruising recession that has produced an aggregate budget shortfall of $534 billion since fiscal 2009, KFF reports in its annual 50-state survey.

Medicaid, which provides health insurance coverage to some 60 million Americans, is funded jointly by the federal government and the states, with the federal share currently ranging from 50% to 74%. The recent recession strained the ability of states to fund their share in 2 ways — putting more Americans on Medicaid rolls, and reducing state tax revenue.

To soften the recession's blow, Congress included a provision in the American Recovery and Reinvestment Act of 2009 to boost the federal contribution to state Medicaid programs. That assistance allowed states to decrease their contributions on average in fiscal 2009 and 2010, although their outlays increased by 10.8% in fiscal 2011 (state fiscal years generally begin in the July of the preceding year).

Even with the federal bailout, some states decreased physician reimbursement rates — 8 in fiscal 2009, 20 in fiscal 2010, and 14 in fiscal 2011. At the same time, the number of states giving Medicaid raises steadily declined. Other states simply froze their rates. For physicians, such trends only made a bad reimbursement situation even worse — Medicaid typically pays less than Medicare and private insurers anyway.

Austerity measures were just as common for other providers. In fiscal 2011, for example, 28 states froze or cut reimbursement for hospitals and 30 did the same with nursing homes.

Rate reductions might have been deeper and more widespread without the stimulus money, noted Vernon Smith, PhD, a coauthor of the KFF report and a principal at research and consulting firm Health Management Associates, during a press conference yesterday.

The stimulus money that plumped up federal contributions to state Medicaid programs ran out in June. As a result, state contributions to their Medicaid programs will rise on average by 28.7% in fiscal 2012, even though overall program costs are expected to rise by only 2.2%. Not surprisingly, the number of states freezing or reducing rates for any class of provider has jumped from 39 to 46. As in fiscal 2011, 14 state Medicaid programs will shrink physician reimbursement.

More States Try to Cut Costs by Improving Quality of Care

Federal law requires Medicaid programs to pay high enough rates to ensure an adequate supply of providers who are willing to care for beneficiaries. However, since the program's inception in 1965, there always has been the fear that subpar rates would cause providers to turn away Medicaid patients, said Dr. Smith. "In some states where the rates were low and continue to be cut, there is evidence that it might be happening."

Not all cost-cutting tactics consist of chopping provider rates, tightening eligibility standards, or taking away benefits. Valerie Harr, director of New Jersey's Medicaid program, noted in yesterday's press conference that more states are taking a creative approach to tough economic times — decreasing costs by improving the quality of care.

This emphasis on quality shows up in the increasing reliance on managed care. In fiscal 2012, 24 states are expanding their Medicaid managed care programs, up from 17 in fiscal 2011, according to the KFF report. Managed care, the report states, serves as a vehicle for pay-for-performance, which requires physicians to report quality measures such as preventive-screening rates and health outcomes for specific patient populations, such as the blood glucose levels of patients with diabetes. Another managed care tool is the patient-centered medical home, designed to better coordinate the care of those with chronic illnesses.

"In this report, the longest appendix is on what states are doing on quality and quality improvement," said Dr. Smith.

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