Medicaid Rates Exceed Some Private Plans

March 9, 2011

Investigative Reports

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The NerveAn important but largely understated truth lurks in an ongoing debate about enormous challenges facing South Carolina’s Medicaid program. It’s the kind of thing taxpayers, and anyone paying for health insurance, might find interesting – to say the least.

The truth is, in some large areas of health care, the taxpayer-funded Medicaid program pays service providers better than private insurance companies do.

Before getting to the bottom of this situation, a few facts are in order.

Medicaid is a health insurance program for the needy – mostly poor or disabled people. The federal and state governments fund Medicaid through a matching formula, usually 70 percent/30 percent, respectively.

Because of several factors, Medicaid is proving to be a budget buster at both the federal and state levels. The reasons include runaway growth in Medicaid enrollment, especially during the Great Recession, along with skyrocketing medical care and health insurance costs.

At the federal level, Medicaid often is mentioned in the context of entitlement reform.

At the state level, Tony Keck, director of the S.C. Department of Health and Human Services, told The Nerve in a phone interview Friday, “Every state has had enormous growth in Medicaid.”

In South Carolina, the number of state tax dollars Medicaid consumes “has doubled in the past 10 years,” Keck said.

That trend, coupled with budgeting decisions by the General Assembly, has pushed the Department of Health and Human Services (HHS) into the red. The agency expects to run an approximately $225 million deficit this year.

During the recession, the Legislature reallocated some $550 million in Health and Human Services reserves and stimulus funding to other state agencies to help keep them afloat.

In addition, this year lawmakers budgeted $205 million for Medicaid, while HHS requested $375 million for the program – a difference of $170 million less, according to agency officials.

Meanwhile, the role of Medicaid in the health care system promises to expand under President Obama’s national reform law, the Patient Protection and Affordable Care Act of 2010.

And, like federal American Recovery and Reinvestment Act, or stimulus, the health care law bars states from raising eligibility standards for Medicaid.

Keck says structural problems in the program are contributing to its escalating costs. “And yet, the president’s health plan expands Medicaid by 15 [million] to 20 million people,” Keck says.

Here’s the kicker, that important but often unspoken truth: Although Medicaid mainly serves a disadvantaged clientele, when it comes to certain services the program actually pays better than private health insurance providers in South Carolina – in some cases much better.

“It varies,” Keck says. “Sometimes we’re paying more. Sometimes we’re paying less. But certainly the private market has a lot more flexibility to pay the right amount.”

With prescription drugs, for example, Medicaid pays more than the coverage provided to at least 400,000 people by the largest health insurance company in the state – BlueCross BlueShield of South Carolina.

Medicaid also pays well for OB/GYN and childbirth services in the state.

In addition, the program is set up to reimburse hospitals in a way that does not encourage the facilities to contain their costs – one of those structural deficiencies that Keck mentioned.

Indeed, a 2008 report by the Kaiser Family Foundation, a nonprofit, nonpartisan health care research organization based near San Francisco, ranked South Carolina Medicaid costs 16th highest among the states.

But South Carolina probably has climbed in the rankings because the state has not cut its payment rates to health care providers since the report was published. “And the rest of the country has for the past three years,” Keck says.

The question is, why? The bigger question is, why does a taxpayer-funded health insurance program pay more for some things than BlueCross BlueShield of South Carolina and other private companies?

To some observers, it all boils down to politics.

S.C. Sen. Tom Davis, R-Beaufort, writes of this dynamic in an op-ed published March 3 in the Orangeburg Times and Democrat. Pointing squarely to a lobbyist-fueled “pay-to-play game,” Davis places much of the blame for the Health and Human Services deficit on the Legislature for enacting “poor public policy.”

Says Davis, “Lawmakers also have driven up Medicaid costs by dictating, through [annual] budget provisos, what care is to be provided, how much is to be paid and to whom. Budget provisos in Columbia are like earmarks in Washington; they allow lawmakers to protect well-connected special interests without having to identify themselves.”

The senator then proceeds to detail the provisos.

Arguably the most significant one, numbered 89.87 in this fiscal year’s budget, prohibits the Health and Human Services agency from reducing payment rates to Medicaid providers.

South Carolina is the only state with such a restriction, according to state officials.

In an effort to help reduce the deficit and lower future Medicaid costs, Republican state Sen. Harvey Peeler of Cherokee is sponsoring a joint resolution to rescind the lock on provider rates.

The Senate passed Peeler’s proposal last week and sent it to the House, where the measure awaits action before the budget-writing Ways and Means Committee.

Contingent upon the restriction being lifted, the Department of Health and Human Services announced last week that it plans to cut most provider rates by 3 percent. The agency expects the reduction to trim its projected deficit by $7.5 million.

The South Carolina Hospital Association, Medicaid advocates and others have expressed concern about abolishing the protection for provider rates, generating a debate in the Legislature, the state’s medical community and in other quarters.

But hardly if at all has the discourse explored the fact that South Carolina Medicaid rates exceed the private sector in some areas.

In his opinion piece, Davis also cites a proviso requiring the state’s Medicaid program to provide medically necessary chiropractic services to eligible recipients, and two provisos mandating how the program pays for prescription drugs.

One of the latter sets reimbursement rates for pharmacies, rather than allowing Health and Human Services, or a pharmacy benefits manager the agency retains, to negotiate rates with pharmacies.

“And it’s not always the best value from the taxpayers’ perspective,” HHS spokesman Jeff Stensland says of the legislatively dictated reimbursement formula.

Peeler’s joint resolution also would repeal the chiropractic care mandate and the legislatively set prescription drug rates.

Stensland describes South Carolina Medicaid payment rates for pharmaceuticals as “quite generous.” “We definitely pay more than the state health plan,” he says.

BlueCross BlueShield of South Carolina administers the state health plan. It insures about 409,000 state employees, retirees and their survivors and dependents, according to figures from the S.C. Budget and Control Board.

Adam Fein, a Philadelphia-based expert and consultant on the pharmaceutical industry who writes the DrugChannels.net blog, pans Medicaid drug rates in a Dec. 9 post headlined “How to Stop Medicaid from Overpaying for Drugs”:

“I’ve long been critical of the overly political nature of pharmacy reimbursement under Medicaid,” Fein writes.

Carmelo Cinqueonce, chief executive officer of the South Carolina Pharmacy Association, did not return a phone message left for him Friday.

Similarly, efforts last week to interview someone with the South Carolina Medical Association were unsuccessful.

In a phone call Thursday, Medical Association spokeswoman Kate Crosby initially indicated that an interview on Friday likely wouldn’t be a problem. Crosby then called back and said no one would be available that day.

A cell phone message left with S.C. Rep. Todd Atwater, R-Lexington and chief executive officer of the South Carolina Medical Association, was not returned.

As with prescription drugs, South Carolina’s Medicaid program also pays more than the state health plan for OB/GYN and labor and delivery services, according to Stensland. In fact, he says, the Palmetto State is second only to Wyoming in its Medicaid rates for those types of health care.

Compounding the resulting financial impacts, and in staggering fashion, Medicaid pays for more than half of all births in South Carolina, Stensland says. “And if we’re paying well above market average that doesn’t make a lot of sense.”

Making matters even worse, the state has one of the highest premature birth rates in the nation. A pre-term birth costs about 10 times more than a full-term delivery, Keck says.

Then there is hospitalization.

Unlike most states and the private sector, which estimate hospital costs on the front end and pay for them accordingly, South Carolina Medicaid reimburses hospitals through an annual cost settlement system that gets finalized on the back end, according to HHS officials.

The way that works is, Medicaid pays hospitals as they go along, and at the end of the year each facility reports its Medicaid costs to the agency. If a hospital’s costs exceeded what it was paid, the department reimburses the facility for the difference.

Dubbed a “cost settlement” system, Keck says it is an antiquated payment method that the private sector and most states do not use because it does not incentivize hospitals to keep their costs down.

The facilities apparently do not contest the point.

“That’s a fair statement,” says Allan Stalvey, executive vice president of the South Carolina Hospital Association. “It is a problem.”

But Stalvey says hospitals are not getting rich off of Medicaid. “We don’t make any money on Medicaid,” he says. “We can’t receive more than the costs.”

Keck and Stalvey both say that HHS and hospitals generally agree about going to the system most other states use, called “prospective payment.”

But whether it’s prescription drugs, childbirth or any other service, Keck says his goal is to get the best outcomes for taxpayers. Toward that end, he says, “In general, we think the way that Medicaid is structured is broken.”

The inherent problems in Medicaid, Keck says, have sparked a “payment reform” movement to restructure the program so that its incentives are geared toward healthy outcomes. “That effort is something that we want to pursue here in South Carolina.”

Reach Ward at (803) 254-4411 or eric@thenerve.org