Why is Florida Considering Medicaid Reform Expansion?

Florida’s Governor-elect Rick Scott faces a $3.5 billion state budget shortfall with few savings options more attractive than the $20.2 billion Medicaid program. Scott's healthcare transition team leader, Alan Levine, proposed in his policy recommendations that “the fastest way to achieve savings … is by expanding [Medicaid Reform] statewide.” This means requiring most Medicaid recipients to enroll in a privately-run managed care organizations or provider services networks.

Of course, Levine’s assumption on savings of Medicaid Reform is overly ambitious. The researchers from University of Florida did find slight savings - on average - for recipients enrolled in Medicaid Reform plans, but Georgetown points to the added program complexity and care access challenges that may actually nullify this financial gain.

Even without analytical support, Alan Levine’s recommendation is not a surprise. Levine supported Medicaid Reform as Gov. Jeb Bush’s Secretary of AHCA – the agency that runs the insurance program for financially disadvantaged citizens. Still, fervent opposition to Medicaid Reform continues from physicians and consumer advocates.

So, why is Levine so supportive of statewide expansion of Medicaid Reform? Succinctly put … to stop the private managed care companies from cherry-picking healthy patients. (Alan Levine acknowledged as much in a statement about the private managed care company, WellCare, leaving the Medicaid Reform program.)

Private managed care organizations are hired by Medicaid in Florida already, and similar organizations provide services to 70% of Medicaid recipients in the United States. These companies, in turn, pay physicians and hospitals for the delivery of healthcare to members enrolled in their plans. Private managed care is different than the traditional fee-for-service Medicaid program. With fee-for-service, no middleman is between the doctor and the patient. To "manage" healthcare, the managed care companies receive per-member-per-month average payments for their enrolled members, called “capitation.” Managed care plans discourage the sick (and costly) patients and attract healthy (and less costly) patients in order to increase profits – called cherry-picking.

Florida Medicaid Reform is unique in that recipients do not have the option to enroll in traditional fee-for-service. This eliminates the problem of the healthy joining managed care and the sick going to the state-run Medicaid fee-for-service program. Furthermore, in Florida Medicaid Reform, the managed care companies are paid a lower rate for healthy members and a higher rate for sicker members. The managed care capitation payments are adjusted to account for certain diagnoses that predict future healthcare expenditures. These “risk-adjusted rates” help solve cherry picking to a certain extent. The more accurately the risk adjustment payment model predicts the future healthcare costs of a member, the less incentive the managed care company has to cherry pick.

The current payment system (non-reform) in Florida is designed in such a way that health plans are still incentivized to attract the healthy Medicaid recipients. What ends up happening is that the sicker members go to the traditional Medicaid fee-for-service. This eventually increases the fees paid managed care by the state, because the capitation rates are paid based on the fee-for-service average cost that includes those very sick members. Statewide risk-adjustment with mandatory enrollment in managed care breaks this cycle.

In part at least, Levine recommends statewide Medicaid Reform expansion in order control private managed care industry’s ability to cherry-pick the healthy Medicaid patients. Certainly, this is a major problem in the insurance market for which risk-adjustment is a potential solution. Considering the lack of evidence to support Medicaid Reform’s improved efficiency, it seems that the recommendation may be driven more by conservative philosophy to privatize healthcare than actual Medicaid Reform results.

Maybe state-wide Medicaid Reform with risk-adjusted will just create new problems. As health economist, Dr. Etienne Pracht, suggested to me: maybe we should all learn about the Theory of Second Best. Then again, would be rather go back to all traditional fee-for-service Medicaid and just hope unnecessary billing by healthcare providers stops all by itself?