shows a red cross with the word Medicaid printed on it, in front of a pile of dollar bills. For Medicaid transformation

Part 2 of our two-part analysis.

By Rose Hoban

By all accounts, it will take at least four years until the Medicaid reform law passed during this year’s North Carolina General Assembly session reaches implementation. Between now and then, reform will be translated into hundreds of pages of regulations, a new administrative regimen and a separate division of the Department of Health and Human Services.

All that from a 14-page bill.

Image courtesy of Images of Money, Flickr Creative Commons

In reality, HB 372 painted a picture of reform using only broad strokes to describe how Medicaid, which serves about 1.8 million people, will be delivered.

“I think if we were going to say exactly what we knew today about what it promises to look like, it would be a one-minute-long presentation,”  Medicaid head Dave Richard told a meeting of the N.C. Institute of Medicine several weeks ago.

Many questions about details of the program have yet to be answered. Those questions include how the state will prevent costs from rising, how the new management entities specified under the statute will be organized and who, exactly, will end up managing the care.

“We believe that this is at least a three-, three-and-a-half year process, and a little bit longer to get it up and running,” Richard said. “You can assume that we’re not going to get approval from [the Centers for Medicare and Medicaid Services] and then on the next day flip the switch.”

And many questions linger about how the different entities empowered under the law will compete for contracts and function once they get their contracts and how solvent they’ll be.

What are you doing?

At the heart of the plan is moving Medicaid reimbursement away from the traditional fee-for-service way of paying for care: You go to the doctor and the doctor gets paid for the visit and any tests performed during the visit. Health policy experts have long argued that this way of providing care incentivizes doctors to do more “stuff” that doesn’t necessarily benefit the patient.

Instead, lawmakers pushed for North Carolina to move to a managed care program, where management companies pay doctors, clinics and hospitals a “capitated,” or set, amount each month for each patient. Then those providers are tasked with managing all of the care for a patient while meeting quality standards.

Actually, North Carolina is behind the curve; some 80 percent of U.S. Medicaid patients are currently in some form of managed care.

One of the issues facing the state is determining how much of every dollar management organizations will have to spend on medical care and how much can be spent on administration, advertising, salaries and profit.

Cindy Ehnes. Courtesy LinkedIn

This so-called medical loss ratio, or MLR, is supposed to protect against excessive profit-taking by managed care companies. It appears the federal Centers for Medicare and Medicaid Services will require the companies to spend a minimum of 85 percent on medical care. But health care experts say there’s quite a bit of discretion for companies to argue that what they’re doing fits under the heading of “care.”

“Those splits between what’s actually an administrative and a medical expense have become increasingly muddy, especially since the Affordable Care Act was imposed on commercial managed care plans,” said Cindy Ehnes, who spent seven years as the lead managed care regulator for the state of California. “Health plans saw an increasing reason to re-characterize much of what they did to be considered patient care.”

Companies argue that tasks that seem administrative, such as sending letters to patients reminding them to visit the doctor or having a nurse make follow-up calls, can fall under medical care.

According to former North Carolina DHHS Medicaid administrator Tara Larson, states are also asking CMS to allow other “non-medical services” to fall under the MLR, like housing services or buying someone a refrigerator for their insulin.

“If these things can improve the quality of health, they should be calculated as part of the MLR,” Larson said.

But she also said insurers would like states and CMS to allow them to roll “all kinds of activities” within the MLR, including tracking fraud and abuse, known as “program integrity.”

Larson said she expected federal regulators to push back on allowing program integrity, for example, to be counted as “care.”

“You see that increased blurring of lines that allows [managed care companies] to pick up an extra percentage of that health care dollar,” Ehnes said.

She stressed that she thinks managed care can effectively reign in costs and facilitate better care management.

“Done right, managed care can bring some wonderful opportunities for better patient care,” Ehnes said. “But it’s got to be something more than 1-800-HELL NO.”

Big program, big profits

It’s no secret in Raleigh that for-profit managed care companies made an aggressive push over the past few years to influence the outcome of the state’s Medicaid debate. Companies hired powerful, high-priced lobbyists and donated tens of thousands to lawmakers in an attempt to win business in what is the largest state to not yet have for-profit managed care companies running Medicaid.

The stakes are high. Even if companies make 2 or 3 percent profit, that’s still hundreds of millions in a program that’s slated to approach $13 billion in state and federal dollars in the coming fiscal year. (The federal government will pick up 66.88 percent of North Carolina’s Medicaid expenditures in the coming year.)

Economists say the best comparison right now in North Carolina to a Medicaid managed care company are the mental health local management entities, which receive a set per-person, per-month fee to provide services for Medicaid recipients and people who are uninsured but qualify for state help.

In 2014, Cardinal Innovations spent 85.7 percent of its revenue on serving patients; 13 percent on operations, management and other expenses; and had 1.2 percent left over, according to its annual report. The annual report of another local management entity, Gastonia-based Partners Behavioral Health Management, shows the organization spent 10.7 percent of its $276 million in expenses on administration and care coordination. (Partners did not list its revenue.)

Community Care of North Carolina has been managing the care for about 1.2 million women and children Medicaid beneficiaries. CCNC is a quasi-state agency that rolls any savings back into state coffers. An audit mandated by the General Assembly and published in August showed CCNC had saved the state more than a billion dollars over a decade, all of which reverted to the state.

Under so-called federal “cost neutrality” rules, any plan implemented by North Carolina must keep savings at the level already achieved by CCNC.

But when a for-profit managed care company saves money, all those savings will revert to the company and its investors.

“If we want competition, let it be with the provider of the services,” said Rep. Nelson Dollar (R-Cary) as he explained his September decision to vote against the final Medicaid reform deal despite working on reform for almost three years.

“Why more than double the administrative costs we are currently paying by adding middle men between doctors and patients?” Dollar asked lawmakers on the floor of the House of Representatives during the reform bill debate. “I just don’t see where the value is.”

Size matters

The bill passed by the General Assembly allows for companies formed by provider-led groups to bid against the for-profit managed care companies. Earlier this month, 11 of the state’s largest hospitals announced a collaboration that would make them a “provider-led entity” to bid for a statewide Medicaid management contract as a not-for-profit insurer.

For such provider-led entities to succeed, it’ll take the kind of size, clout and financial backing of such a consortium, said several health care experts.

Ehnes, who oversaw more than 300 managed care entities in California during her seven-year tenure with state government, explained that commercial managed care companies have deep pockets and profits garnered in other states that allow them to bid low on a contract, lower even than the usually low rates paid by state Medicaid programs.

“The managed care plans have advantages of scale,” she said. “They have competitive advantages around provider contracting, they’ve got good expertise, they can presumably bring a different level of skill to provider negotiations. They’re also not neighbors.”

Ehnes also said big commercial companies have marketing advantages. They’ve been around for a while and people know their names. She said that was the case as California rolled out its insurance exchanges when the Affordable Care Act went into effect.

“The number was that 94 to 96 percent of people chose a brand-name plan, as opposed to a regional, no-name plan,” Ehnes said. “It surprised us to a certain extent; we thought people would like the homegrown. But they don’t; they like the big name.

“That tells us a lot about how that playing field is un-level from the beginning.”

And those deep pockets allow for commercial companies to be able to take a loss for several years without going under. That’s something Sen. Ralph Hise (R-Spruce Pine) mentioned during a Senate Health Care Committee hearing on Aug. 6: that managed care company representatives had told him they expected to lose money for several years.

“I’ve had conversations with many entities that run insurance all across the state, and most believe that for the first few years that provider-led entities or managed care entities will lose money operating in this state,” Hise told the committee. “Their costs will exceed the revenue the state pays them until they can develop their systems and others to be prepared to control patient costs and get patients into the appropriate levels of care.”

He pointed out that prevention models of care don’t return savings “immediately.”

“Because how they make their funds is to control costs for individuals long term,” Hise told reporters when asked how those companies could survive.

In addition to losing money on patient care, all of the new managed care providers, whether they be for-profit commercial providers or provider-led entities, will need to build up reserves, known as solvency requirements.

“To be able to operate as an insurer, you have to have adequate resources to pay claims,” explained state Department of Insurance attorney Benjamin Popkin. He said that insurers need money equal to several months’ worth of potential claims as a risk reserve.

Managed care companies will arrive in the state with reserves in place and have access to capital markets to cover their losses. But the new provider-led entities will have to build up those reserves, all while paying out claims and, if Hise’s predictions hold, losing money.

It was these kinds of circumstances that sunk many of the insurance cooperatives that were established in the past few years to offer insurance on the online exchanges created by the Affordable Care Act.

That outcome was predictable, said Allen Feezor, former head of policy for the state Department of Health and Human Services. He predicted those potential problems in an address to the National Alliance of State Health Co-ops in 2012.

Anti-trust me

Finally, locally created provider-led entities will have to deal with potentially running afoul of antitrust regulators such as the Federal Trade Commission.

Prior to now, hospitals working in concert has been a no-no to FTC regulators.

But the provider-led entities such as the one proposed by the state’s large hospitals are the natural outgrowth of legislation like the Medicaid reform bill. And in other parts of the health care system, the Centers for Medicare and Medicaid Services has been encouraging accountable care organizations and other arrangements of providers that “integrate” services under one umbrella.

That leaves hospitals and providers walking a fine line.

“The FTC is trying to preserve the market and CMS is trying to create new institutional arrangements that could lead to better care,” said Duke University law professor Barak Richman, who studies the health care system. “I think that the CMS approach is really curtailed by the FTC limitations. I also think that CMS understands that.”

“We’ve been consulting with antitrust attorneys,” said Kelly Vogel, a health care consultant who’s been hired to help plan the joint effort by the state’s hospitals.

“There’s no difference between any other joint venture hospitals have taken,” she argued when asked about potential antitrust concerns. “They’ll only be doing Medicaid and still operating separately as health systems.”

Vogel said that because the systems would not be consolidating into one, the FTC should give its blessing.

No matter what the FTC says, North Carolina’s health care system is destined to look very different by the time the new Medicaid system launches, said Tara Larson, who used to administer Medicaid for DHHS.

“You’re going to see hospital systems and larger provider systems.… You’re going to see conglomerates, you’re going to see mergers, you’re going to see acquisitions,” said Larson, who now works as a health care consultant.

“Part of it will be economies of scale. Part of it will be capturing the needed expertise and part is going to be the ability to share risk and to spread risk,” she said.

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