Managed Medicaid

Michigan Medicaid HMOs Avoid Pay Cut, Begin to Negotiate FY '08 Rates

Reprinted from the June 14, 2007, issue of MEDICARE ADVANTAGE NEWS, biweekly news and analysis on the Medicare (and Medicaid) managed care programs.

Michigan's Medicaid managed care plans averted significant payment rate cuts set to take effect June 1 in the fiscally strapped state when the legislature came up with a last-minute "fix" to handle a fiscal 2007 budget shortfall of about $800 million. Plans have since shifted gears as they continue negotiations with the state over rates — expected to increase an average of nearly 4% across regions — for the new fiscal year starting Oct. 1. Yet Michigan HMO industry lobbyist Rick Murdock cautions that state lawmakers have only averted - not solved - the state's financial woes. Thus, any pay hike to Medicaid plans is contingent on having an adequate budget in place for the next fiscal year, he says, "so the battle never ends."

The bottom line? "I think it's doable. I'm confident we'll get there," Murdock, executive director of the Michigan Assn. of Health Plans, says of a 2008 Medicaid plan rate hike. Murdock notes that his group and others collectively lobbied hard against a draft Medicaid policy bulletin issued May 1 by the Michigan Dept. of Community Health (DCH) outlining a 6% average rate reduction across provider types, including Medicaid health plans, for the last four months of fiscal 2007. At that time, Murdock said this would make it challenging to Michigan's Medicaid plans in their efforts to sustain provider networks.

If the rate reduction had occurred, Michigan's 13 Medicaid plans serving about 960,000 beneficiaries would have felt a "ripple effect" resulting in a loss of federal matching funds and HMO provider tax totaling close to $25 million from June 1 through Sept. 30, Murdock estimated in May. He said plans would have lost between $7 million and $8 million from the general fund over the four-month period.

Subsequently, state lawmakers reached an agreement on handling the fiscal 2007 budget shortfall after Memorial Day weekend, allowing the state to rescind its May 1 notice of impending rate reductions, Murdock says. He says savings that would have been achieved from Medicaid provider pay cuts now are being addressed through "a variety of one-time fixes," including the use of some of the state's tobacco-fund settlement monies and some state program reductions and cuts. Yet while DCH itself must come up with $30 million in program cuts, the agency cannot do it through Medicaid provider rate reductions, he explains. In the week of June 11, the state legislature also expects to find a "dollar-for-dollar replacement" for Michigan's "single business tax," which generates about $1.9 billion in revenue annually for the state, he says, adding, "It's a piece at a time, I guess."

State legislators, by focusing on one-time fixes for 2007 and not on infrastructure, still must find another $1 billion or so beyond the single-business-tax replacement for 2008, Murdock notes. In the meantime, he says, Michigan's Medicaid HMOs are in the final stages of getting their comments to DCH on the actuarial soundness of the proposed fiscal 2008 rate increase. "To fund that, we need to get appropriations for DCH [for the new fiscal year] reflecting that amount," he says.

Feeling 'Temporary Relief'

Brian Wright, a securities analyst with Jefferies & Co., Inc., says his firm views the decision in Michigan to avoid the 6% rate cut effective June 1 "as a modest positive for Molina, as we had been concerned with regard to the implications a rate cut would have on profitability in Molina's third largest state." As of March 31, Molina had about 221,000 Medicaid members in Michigan, making it the state's largest Medicaid plan, he notes.

Others also are feeling what Murdock describes as "temporary relief" from current developments.

"As anticipated, with everyone holding their breath, they put together a revenue plan - and fee decreases for everybody [i.e., Medicaid HMOs and other providers] were rescinded. Now we're preparing for the next fiscal year," says Janet Grant, executive vice president for business development and regulatory affairs at CareSource Management Group, which runs Community Choice Michigan. Grant had calculated the actual net impact to plans for any pay cuts from June 1 through Sept. 30 would have been a 3.9% average rate reduction because the state carved costs such as pharmacy out of the plan rate and because of some cost pass-throughs to hospitals.

Grant had said that Community Choice Michigan expected to get closer to a 4.6% rate reduction effective June 1 because of its patient mix and service areas. She had projected a $250,000 impact on the 50,800-member plan's bottom line from the expected rate cut from June 1 through Sept. 30, based on what the plan would have had to absorb and could not pass on in terms of provider fee-schedule reductions and administrative costs.

Carl McDonald, a securities analyst with CIBC World Markets, in a June 7 briefing paper listed Michigan, along with Virginia, New Jersey and Florida, as among those states that were "very profitable places to operate a Medicaid plan last year."

Grant concurs that Michigan's Medicaid plans "have been profitable, even with the challenging rate environment." She attributes that to plans' learning to operate efficiently. When Michigan set payment rates for Medicaid plans in 2004, the state found that it needed to grant a 20% payment rate hike from October 2004 through September 2006 in order to meet federal requirements for actuarial soundness. Michigan gave a 7.5% rate increase to Medicaid plans for fiscal 2005, then recalibrated rates and decided against giving an increase for fiscal 2006. Subsequently, state lawmakers approved a 5% rate increase to Medicaid plans for fiscal year 2007, which began Oct. 1, 2006. Thus, Grant asserts that Medicaid plans "are being challenged this year.…The two years of no rate increase have caught up with us."

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