News: CJ Exclusives

Critics Call Medicaid Reform ‘HMOs on Steroids’

'Accountable care organizations' force taxpayers to pay cost overruns

Accountable care organizations that are the cornerstone of the state’s Medicaid reform plan are “HMOs on steroids,” one national expert says, and they face certain opposition in the state Senate.

“I just don’t think the plan itself is bold enough,” state Sen. Louis Pate, R-Wayne, co-chairman of the Senate Appropriations Committee on Health and Human Services, said March 17 after the state Department of Health and Human Services submitted its proposal to the General Assembly.

“We can’t do anything in the short session that really approaches what we need to do,” said Pate.

Pate was a member of the Medicaid Reform Advisory Group that met for several months with DHHS staff and outside consultants. The panel sought a Medicaid overhaul to curb out-of-control spending, make budgeting more predictable, and correct longstanding administrative chaos in the agency.

The McCrory administration wants to have multiple local ACOs, each serving a minimum of 5,000 patients, across the state. Medicaid has 1.8 million enrollees and a total federal-state budget of $13 billion annually.

Each ACO would have primary care physicians, multiple providers from various disciplines, its own budget, a patient base assigned by the state, share some risk in budget overruns, and split savings with the state.

“For the first time ever … the state will be paying for value, not simply for volume” of health services, said Bob Atlas, the DHHS consultant who steered the reform initiative.

“The Medicaid budget becomes significantly more predictable for the legislature. By having providers share in the up side and the down side, variances from the budget, should they occur, will partly belong to the provider community,” Atlas said. “This reduces volatility in the state’s budget.”

According to the DHHS proposal submitted to the General Assembly, the new Medicaid delivery model is estimated to save the state $326 million over a five-year period from 2015-20. Combined savings from state and federal sources would be $987 million over that period.

“Even with the savings that this current plan projects to have, we are not going to get above budget predictability,” Pate said.

“It looks to me like, based on the math I see, we’re going to be losing money for years to come. That keeps us from raising teacher salaries and all of these other things that are absolutely necessary to keep our state government going,” Pate said. “We need to go back and see if we can’t improve the plan that’s presented.”

In a letter to DHHS Secretary Aldona Wos, Pate framed his objections to the new plan around a nearly $2 billion budget shortfall over the past four years in Medicaid.

With the legislative Fiscal Research Division expecting a future 5.8 percent national growth rate in Medicaid spending, the state’s Medicaid appropriation would grow by an additional $1 billion over the next five years, Pate wrote. That figure would drop to only $840 million after implementing the ACO initiative, Pate said.

If an ACO saves money, it would receive bonus rewards — similar to a refund — capped at 15 percent of its annual budget.

An ACO’s financial penalties for cost overruns are capped at very low levels, requiring state taxpayers, rather than providers, to make up the difference.

Under the proposed plan, an ACO would pay a penalty of no more than 10 percent of its budget, and it wouldn’t reach that level until 2020. In the first year the penalty would be limited to 5 percent of the ACO’s budget. The cap would rise to 7.5 percent in years two through four.

Complicated ‘discounts’

But even that does not reflect a complicated array of “discounts” built into the formula that offset the amount of the penalties the ACO must pay. ACOs that take advantage of discounts, say, for meeting targets of patient care end up imposing even higher costs on taxpayers.

Pate said the cost-sharing formula is too lax.

“We’ve got to get the providers engaged in trying to save money,” and that could be accomplished by placing more accountability on them, he said. He stopped short of saying he favors full capitation, in which an ACO would have to pay all its losses but also keep all savings.

DHHS says it will implement the monitoring and evaluation system tied to ACOs with existing staff and resources.

Piling another layer of bureaucracy on a department that Gov. Pat McCrory has said already may be “too large to succeed” remains a concern, Pate said.

“We’ve been criticized for not taking on more Medicaid patients. We can’t take care of the ones we’ve got,” he said.

ACOs are a new delivery method, and gained popularity after the Obama administration urged their use in the Medicare program.

“There are those who refer to Accountable Care Organizations as HMOS on steroids,” said Devon Herrick, a health economist at the Dallas-based National Center for Policy Analysis.

“It hasn’t even been successfully tried in Medicare populations to any degree, much less Medicaid populations,” Herrick said.

“If they’re really serious, the legislature would only have a couple of pilot projects” that enroll patient populations of similar size and health status, then compare them, he said. “You would compare which is less expensive, and then you would roll out the one that actually works.”

About three-quarters of the nation’s Medicaid patients are in managed care networks, a competitive bidding delivery system in which costs usually are fully capitated, meaning the plan managers assume all risk and receive all savings.

Since most states are moving in that direction, Herrick expressed surprise that North Carolina backed off an earlier plan to use the managed care model.

Most ACOs are organized and driven by hospitals, Herrick said. The North Carolina Hospital Association has embraced North Carolina’s plan eagerly.

“If the provider community is embracing accountable care it sounds to me like they know they can manipulate that system more than if they have to compete on price under full capitation,” Herrick said.

“The political process sometimes helps you to avoid these hard choices,” Herrick said. “It sounds to me like it’s probably a giveaway to the hospitals.”

Dan Way (@danway_carolina) is an associate editor of Carolina Journal.