North Carolina state government is facing a severe cash crunch. The General Assembly needs to examine every part of the state budget to mitigate the problem through lower spending rather than higher taxes. N.C. Senate leader Phil Berger, R-Rockingham, announced in April the Senate would not try to override Gov. Roy Cooper’s budget veto because the state’s finances had rapidly deteriorated.
One of the most tempting options is to reclaim the $425 million held in the Medicaid Transformation Reserve. Changing course like this isn’t unprecedented. In addition to examples from other programs in North Carolina, other states have regularly had to rethink their attempts at managed care. Alabama abandoned its transition to managed care in 2017, citing a change in federal regulations. When Alabama returned to Medicaid reform in 2019, the state embarked on a case management approach more like Community Care of North Carolina, the erstwhile hope of previous Medicaid reformers here.
The budget picture is bleak. Revenue for the current year is expected to be $1.6 billion less than originally budgeted and another $2.6 billion less than budgeted for fiscal 2020-21. The Savings Reserve, or “rainy day fund,” has $1.1 billion, and the unreserved cash balance at the start of the year was $1.7 billion. In other words, Cooper and the General Assembly have $2.8 million in savings and cash to cover $4.2 billion loss in lost revenue from a $51 billion two-year budget.
Cooper is responsible in finding savings to balance this year’s budget by the end of June. On April 23, his budget office instructed state agencies to freeze hiring, delay salary increases, and reduce other expenses. These long-overdue measures won’t produce enough savings to fulfill his mandate. The sizable unreserved cash balance affords Cooper the ability to avoid making tough choices, which is another reason for the General Assembly should sock away as much as possible in the savings reserve.
In addition to the unreserved cash balance and the Savings Reserve, the state may be able to use some of the $3.6 billion received from the Coronavirus Relief Fund, a part of the federal Coronavirus Aid, Relief, and Economic Security Act. Congress intended the money to cover new coronavirus-related costs, but it may still provide flexibility for states to offset revenue shortfalls, which House Speaker Tim Moore said would be a “game-changer.” Congress also may provide another round of money that states could use to offset lost revenue, though there would be no need for that if states could use some of the money they have already received.
Even with federal assistance, state finances will be squeezed. The more Cooper relies on the fund balance to get through June 30, the less will be available for next year. The burden will fall to agencies and the General Assembly to make programmatic and personnel cuts to ensure a balanced budget.
Against the $425 million reserve fund is the hope that managed care will provide budget savings and improve health outcomes. Neither result seems assured.
Research has indicated managed care organizations have strong incentives to get and keep people enrolled in Medicaid. They are paid per member per month, so their incentive is like that of a fitness club: Maximize the number of people enrolled who don’t use the service, which would fit the population of mostly mothers and children covered in North Carolina’s managed care contracts. Both the Government Accountability Office and the Medicaid and CHIP Payment and Access Commission found no conclusive evidence managed care reduces costs or improves access and quality of care. Neither has University of Pennsylvania professor Mark Duggan in a number of papers comparing managed care and fee-for-service Medicaid programs. A two-part post at the Health Affairs blog in 2018 reviewed many of the shortcomings in state Medicaid managed care efforts.
N.C. Department of Health and Human Services estimated managed care would actually cost more than the current fee-for-service approach — but for the premium tax paid by the managed care organizations. That tax, like the provider tax on hospitals, is a flawed scheme to inflate payments to providers with unearned federal dollars.
Uncertain improvements. Flawed finances. Bad timing. The people initially added to managed care will be pregnant women and children, who are the lowest-cost enrollees. Utilization is down due to COVID-19, but enrollment is up due to the economic downturn. Managed care organizations will do well, but state finances may not. Certainly, in this case, that’s not a good thing. If the program had started in November, perhaps DHHS could have sought a discount from insurers, such as those that individual subscribers have received from health and auto insurance. N.C. Health and Human Services Secretary Dr. Mandy Cohen already complained about the second-year $42 million administrative cost reduction in the budget, further calling into question projected savings from a shift to managed care.
The John Locke Foundation supported the transition to managed care when it was proposed, but the Cooper administration’s delay in implementation and the current budget straits change the costs and benefits.
At this time, lawmakers should use the $425 million for known shortfalls, rather than to kick off an expensive experiment at an agency with a bad record of contract enforcement. They could restart the managed care transition process on a more limited scale in 2021 with a clearer sense of what works to reduce costs and improve outcomes.
Joe Coletti is a senior fellow analyzing fiscal and tax policy at the John Locke Foundation.