Since January, state officials have maintained that North Carolina Medicaid is “broken.” Last month, Gov. Pat McCrory proposed an overhaul of the program, which provides health care for more than 1.8 million North Carolinians. In this first of two parts, N.C. Health News takes a deep look at the state of the program.

By Rose Hoban

On numerous occasions over the past three months, North Carolina Gov. Pat McCrory has made the claim that the state’s Medicaid program is “broken.”

The prime piece of evidence cited by McCrory for this assertion is an audit presented by state Auditor Beth Wood at the end of January that found North Carolina’s Medicaid program had gone hundreds of millions of dollars over budget for at least three years running, costing taxpayers in the state upwards of $1.2 billion.

The audit also found that administrative processes for the program were not well monitored, leading to cost overruns.

But how broken is the Medicaid program? Some observers say that the problems with Medicaid have been trumped up and that McCrory’s assertions of the program’s problems were devised to provide him with the political cover not to expand Medicaid as allowed for under the Affordable Care Act (often called Obamacare).

And even as the governor was rolling out his plan to overhaul the state’s Medicaid program, Sen. Richard Burr was in Winston-Salem presenting a national innovation award to the leaders of Community Care of North Carolina, the program that manages 1.3 million of the state’s 1.8 million Medicaid patients.

National data from the Kaiser Family Foundation have shown that North Carolina’s Medicaid program costs have increased at the slowest rate in the nation and per-capita costs are the lowest in the Southeast. Multiple states have asked North Carolina for help building programs that look like Community Care of North Carolina.

“There is no crisis in North Carolina Medicaid, and there is no national crisis in Medicaid,” said health policy researcher John Oberlander from the UNC School of Medicine. “This idea that Medicaid spending per person is spiraling out of control – it’s just not true.”

“They say it’s not about the budget, but they wouldn’t be doing any of this if it wasn’t about the budget,” said former DHHS Sec. Lanier Cansler. “The whole discussion is driven by the budget.”

People added to rolls

“Medicaid spending in North Carolina has gone up a lot in the last decade,” Oberlander explained. “But the answer why is that we had two recessions, and Medicaid is designed to be countercyclical. It’s supposed to expand when the economy gets slower and people lose their jobs.”

In 2000, about 1.2 million North Carolinians were enrolled in the Medicaid program; by 2009, that number had grown to 1.8 million. During the same time period, the overall population grew by 1.5 million people, with North Carolina experiencing one of the nation’s fastest rates of population growth.

But North Carolina never completely recovered from the economic downturn of 2001, and since the economy crashed again in 2008 the state has struggled to recover. The state continues to have one of the nation’s highest unemployment rates, and about one in five people lack health insurance altogether.

“If Medicaid had not expanded in North Carolina, we’d have a lot more uninsured than that,” Oberlander said. “So Medicaid did what it was supposed to do in the last decade: It acted as a safety net for a lot of people. What’s been driving spending is that Medicaid has been covering more people, because more people in North Carolina needed Medicaid when they lost jobs.”

“So now people are turning around and saying, essentially, ‘It’s in crisis, cut it back.’ Well, what do you want? Medicaid did what it was supposed to do,” Oberlander said.

As the economy improves, national Medicaid enrollment is starting to slow, according to the Kaiser Family Foundation.  In KFF’s annual Medicaid budget survey, states projected enrollment to increase an average of 4.1 percent in 2012, lower than the 5.5 percent rate of growth in 2011 and much lower than the 7.2 percent growth rate in 2010.

Program costs out of control?

The January audit presented by Wood pointed out that in the last three fiscal years, Medicaid overran its budget by $316 million in 2010, $403 million in 2011 and $418 million in 2012. Wood maintained those cost overruns were largely due to administrative problems and to poor forecasting of future costs.

But those forecasts are notoriously fickle, said Jim Verdier, the former Medicaid head for Indiana who now consults with other states’ Medicaid programs.

“There are a lot of things that can screw up your projections,” he said. “For example, flu season can have an impact. Health plans can take a hit financially if it’s a bad season and they don’t have good reserves.”

Because Medicaid is an entitlement program, when Medicaid patients show up at a hospital or a doctor’s office they can’t be denied care. Providers still need to get paid, even if the budget has been exceeded.

When those costs are incurred, the federal government pays two-thirds of the bill and the state pays a third, meaning that for every $100 million of care delivered North Carolina pays about $34 million.

Indeed, this winter’s harsh flu season produced unusually high hospitalization rates for seniors. Medicaid head Carol Steckel has already warned lawmakers that this puts North Carolina about $40 million over this year’s Medicaid budget.

“It’s not like the education budget, where you can just cut 1,500 teachers to trim the budget,” Oberlander explained. “People get sick and you need to treat them. Then you need to pay for it.”

Verdier said in the world of private insurance, companies such as BlueCross BlueShield of North Carolina maintain reserves to smooth out those kinds of fluctuations in the budget.

“But it’s relatively unusual to have a reserve for Medicaid,” he said. “More typically, there will be an overall state government reserve fund designed to deal with overruns in all state government. That would be the cushion for the unpredictability in Medicaid and other programs as well.”

During the economic downturn of the past three years, North Carolina all but depleted its rainy-day fund. The governor’s new budget proposes replenishing that fund, as well as creating a Medicaid reserve of $90 million per year.

Administrative costs

In the audit, Wood found that other states pay less for Medicaid administration. Wood cited the case of Arizona Medicaid, which, according to her report, costs that state only 1.73 percent to administer. Arizona’s Medicaid program is administered by a for-profit managed care company.

McCrory has mentioned this on several occasions, saying that North Carolina’s administrative costs are “30 percent higher” than comparable states.

But that part of the audit findings was refuted by McCrory’s own Medicaid head, Carol Steckel.

Steckel told a legislative health and human services subcommittee on Feb. 14 that for states with managed care companies running Medicaid, administrative costs are often hidden in the contracts with those companies.

“Actually, the administrative cost functions are in the managed care entities, and if you look at what is termed the ‘medical-loss ratio,’ which is what the managed care companies are allowed to use for administration, if you look at that for Arizona, their administrative costs would actually be 13.74 percent,” Steckel told the committee, explaining that the managed care company was doing all the administration, rather than the state.

“We have a saying in Medicaid, ‘If you look at one state, you see one state,’” Steckel continued.

If the additional amount of Arizona’s administrative costs were included in Wood’s audit, then North Carolina’s administration costs fall to only 8 percent above the average of the nine states mentioned in the report (see chart). If administrative costs are calculated on a per-beneficiary basis, then North Carolina falls into the middle of the pack.

Bill it to ‘admin’

In the private sector, most insurance companies have administrative costs of 15 percent to 20 percent or more. The Affordable Care Act caps administrative costs for private insurers at 20 percent.

In a recent issue of the North Carolina Medical Journal, former DHHS Sec. Lanier Cansler wrote that internal Medicaid data showed the central management of the state’s program accounted for only 3.2 percent of costs.

He pointed out that “over 50 percent of the costs in [the state auditor’s report] were costs incurred by the state’s 100 counties in meeting their responsibilities with respect to Medicaid management, and by the Local Management Entities in their administrative oversight of the state’s mental health care delivery system.”

Former Wake County Human Services Medical Director Peter Morris said some of those administrative costs were deliberately high, and that the federal government matches the administrative costs of the Medicaid program one-to-one.

“Say you want to hire a Medicaid-eligibility worker,” Morris explained. “The social service departments only pay 50 percent of the cost of that position. So if Wake County wanted to create 10 new eligibility workers … they only had to pay for five.”

“You capture every administrative cost you can legally do under Medicaid rules and present that as a package to the fed and they’ll match administrative expenditures,” Morris said. “So within the Medicaid system, it’s a strategy to maximize the share and legally claim administrative costs and submit them for federal reimbursement.”

Morris said that leads to administrative costs appearing much higher. But he also said many states employ the same strategy.

Wood’s audit concluded that these kinds of practices must stop. She recommended the Medicaid program be accountable for all the costs of Medicaid administration and reign in administrative spending by counties and mental health entities.

The old, the sick, the poor

One of the biggest problems with Medicaid, said Don Taylor, a Duke University health economist, is that it attempts to provide a safety net for some of society’s most vulnerable.

“It’s real hard to take care of an 80-year-old with cancer, dementia and heart failure who lives in a nursing home,” Taylor said. “The secretary and Director Steckel are right, the coordination problems are bad, in particular for this population. But that’s the entire health care system; Medicaid is not unique in its problems there.”

Taylor explained that a significant portion of Medicaid expenditures go to pay for the so-called “dual eligible” population: those people who qualify for Medicare because of their disability or their age and for Medicaid because of their poverty.

“Most people don’t realize how big a chunk of the money is nursing homes for poor elderly people,” Taylor said. “And if you don’t do something about that population, you can never do anything about the cost, because they’re the most expensive people.”

Many who have assets when they enter nursing homes end up “spending down” most of their lifetime savings. Then when they’re poor enough to qualify for Medicaid, the program pays for their care.

According to the Kaiser Family Foundation, about 27 percent of North Carolina Medicaid recipients were either elderly or disabled in 2009. The cost of services for those two categories of recipients made up about 63 percent of all Medicaid costs that year.

Nationwide, Medicaid pays for just about half of all nursing home spending.

According to an annual survey by Genworth Financial of nursing home costs, the average cost for a semi-private nursing home bed in North Carolina is about $71,700 per year.

“When Medicaid was passed in 1965, they thought they were creating a biomedical-based health care system,” Taylor said. “I don’t think Congress had in mind that what they were doing was passing the default nursing home payment plan for the whole country.

“Back then, we had a war on cancer, not a war on helping people go to the toilet.”

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