LTC Bullet:  LTC Embed Report #1 from the Policy Front in DC

Friday, July 29, 2011

Washington, DC--

LTC Comment:  With 4,700 new miles on the Silver Bullet, I've hit the ground running in the nation's capital.  Our strategy and an update on Medicaid's LTC financing woes follow.

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LTC Comment:  First thing to say is that the debt ceiling crisis has sucked all the air out of the political conversation here.  At least such air as remained after temperatures exceeding 100 degrees Fahrenheit and a heat index pushing 120!

That's part of why I adapted our strategy for this first two weeks--away from a focus on meetings with LTC interest groups and toward developing a policy paper that details and supports our approach to LTC reform.  When I'm back in DC for September and October, we'll have the ammunition we need to push ahead.

[Stay tuned below for an excellent summary of Medicaid's desperate financial condition provided yesterday at the LTC Discussion Group by Matt Salo, Executive Director, National Association of Medicaid Directors.]

Our plan is to present a proposal for Medicaid savings sufficient to (1) pay for a good portion of the $30 billion per year "Doc fix" and (2) to expand the markets for private LTC financing alternatives such as insurance and home equity conversion.

The "Doc fix" is the next political crisis looming in DC.  Congress must either cut physicians' Medicare fees by 30 percent or find a way to pay for the cost of not doing so.   That's where the $30 billion per annum comes in.  We think we can save at least $20 billion per year by targeting Medicaid LTC to the needy and simultaneously improving the program.

How?  That's what I'm working on now, but if you'd like a preview, take a look at "How to Save Medicaid $20 Billion Per Year AND Improve the Program in the Process."  I wrote that piece in 2005 based on 2002 Medicaid expenditure data.  I'm updating it now.

Why do I think we can save that much money from a welfare program that already allegedly forces anyone and everyone into extreme poverty before it helps?  Read practically anything I've written for the last 25 years and you'll find the logic and the evidence.  But the timing is finally right to get the job done.

What's different?  The country is broke.  Pretty much everyone realizes and agrees now that something has to be done to rein in entitlement programs.  Social Security and Medicare remain political third rails--although at somewhat lower voltage.  But Medicaid is on everyone's radar screen for potential savings.

Just lately, a media spotlight has shone on Medicaid that will help to open doors to reform.  If you haven't seen the latest coverage of widespread, egregious Medicaid fraud and abuse, make it a point to check these sources out right away:

These and similar newsworthy wedges will help us pry open public interest in the widespread misuse of Medicaid.  This welfare program, designed and intended as a long-term care safety net for the needy, has gradually become free inheritance insurance for baby boomer heirs.  That has to stop and it will stop.

The only remaining question is how many people will be hurt when the bottom falls out of Medicaid-financed long-term care.  There is still time to mitigate the damage but time is running out.  Keep an eye on these "LTC Embed" reports to watch our progress toward a solution that saves Medicaid for those most in need and diverts everyone else to better options.

Now here's a summary of the National Association of Medicaid Directors' exec Matt Salo's remarks at yesterday's LTC Discussion Group meeting followed by our LTC Comment:


Paraphrase of remarks by Matt Salo, Executive Director, National Association of State Medicaid Directors, at the LTC Discussion Group meeting on July 28, 2011

I'm going to give a bad-news speech.  It doesn't help to be too optimistic.  I'll talk about the fiscal issues states face and that Medicaid directors are struggling with.  Then dialogue and your questions.

A recent state fiscal report by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) explains the big picture.  I'll focus on a couple of things.  States are driven by balanced budget requirements that our federal partners do not have.  When costs exceed expectations and revenues are below expectations, states hope for the federal "cavalry" to come to the rescue.  States benefited enormously from supplemental revenues provided by the ARRA (American Recovery and Reinvestment Act), AKA "the Stimulus."  The stimulus bill provided over $100 billion of help to states in Medicaid alone!  It enabled states to avoid draconian cuts in state spending, especially in Medicaid.  But all good things come to an end and so has this federal stimulus money, as of June 30, 2011.

Here's some context for states' current situation.  State budget cycles usually start July 1.  The current cycle is going to be very difficult.  For example, look at the past two years.  States faced a $200 billion shortfall, which they had to make up.  Federal stimulus money covered half of that problem.  The states had to find the remaining $100 billion in savings.  They did it with roughly 70% spending reductions and 30% tax increases.   That's how the states got through the past two years.

Starting July 1, 2011, states are facing an additional $175 billion shortfall, but the federal stimulus money is all gone.  State revenues are increasing again, but they are not back up to 2008, pre-recession levels.  When it comes to spending cuts and revenue increases, all the low hanging fruit has already been taken.  Those measures are assumed in the baseline going forward.  There are no easy fixes left.  The public has even less appetite for tax increases at the state and local level than at the federal level. 

So, states face two major challenges:  (1) surviving the next couple years of budget shortfalls with no easy answers left and (2) implementing the Affordable Care Act, AKA ObamaCare, without adequate staff and resources.

On the financial side, the answer (cuts) won't come all from Medicaid.  Medicaid has a built-in disincentive to ever make big cuts.  The "federal match" is as high as 77%.  If states try to find general revenue savings by cutting Medicaid, they lose federal matching funds they would otherwise have received.  States will make Medicaid cuts but they will not cover the whole $175 billion shortfall from Medicaid cuts.  Major cuts will also come from education with higher ed slashed first.  This is "coming soon to a state near you."  Also cut will be corrections, transportation, and K-12 education.

Politically, as these cuts are made which affect the middle class, you will see a political rebound.  In the next couple of years, there will be a push to reinvest in education, infrastructure, and workforce.  There will be pressure to cut Medicaid and health care to help finance those other areas.  That will make implementation of the Affordable Care Act even more difficult.

You're not going to see a lot of Medicaid cuts right away for other reasons also.  Medicaid is essentially an equation.  States pay providers to deliver services to people.  Where can states go to find savings?  Thinking inside the box, they have only three choices.  They can pay providers less, deliver fewer services or cover fewer people.  Covering fewer is out because of the "Maintenance of Effort" (MOE) rules.  MOE took effect originally under the Stimulus.  The ACA extended MOE and decoupled it from the Stimulus.  MOE requirements apply through 2014 and for kids through 2019.  That's a good thing, right?  We don't want to cut people off from services.  Sure, but it means that other parts of the equation are going to take a bigger hit.

Providers, for example.  Medicaid doesn't pay well to begin with.  It pays less than Medicare and private insurance in all categories.  Medicaid pays providers only 70% of Medicare, which pays roughly 70% of private pay rates.  At some point, providers will just say they can't deliver services at such low rates and they will walk away.  The states are concerned.  The feds publish regulations to restrict reductions in provider payments, but in the end, Medicaid shouldn't be paying less than half the private pay rate. 

But if you can't go after provider rates, the only remaining option is reducing services.  There are two kinds of services?  Mandatory ones which you can't get rid of.  And optional services of which there are two flavors:  (1) those you can get rid of but don't save any money, such as podiatry or chiropractic services and (2) those that would save money but you don't dare drop politically, such as prescription drugs and long-term care, which is where all the money is.  If Medicaid stops paying for drugs and LTC, who else is going to step up?  The answer at this point is nobody. 

[LTC Comment:  I'd challenge this conclusion.  If Medicaid stopped paying for LTC, reverse mortgages and private insurance would definitely step in to fill the gap.  But Medicaid does not have to stop paying for LTC entirely.  Just stop paying for people with big home equity, businesses, and other unlimited exempt assets.]

Thus, there is not a whole bunch of potential savings anywhere in that traditional Medicaid equation.  So, states are starting to think outside the box.  They can make a pretty good argument that the current payment system, used for decades, has not been efficient or effective.  We know we're spending too much and not getting a quality product.

The solution can't come from paying less for fewer services or for fewer people.  We have to go to a different delivery systems.  That's why states are going so heavily to managed care.  72% of Medicaid recipients are in some kind of managed care.  They are  mostly the TANF (Temporary Assistance for Needy Families) population, poor women and children.  But that's not where all the money goes.  The really expensive populations are long-term care, the Aged, Blind and Disabled, and dual eligibles.  So we're seeing states moving from where they are to more managed care for these complex populations.

Spending all our time and effort on people who are mostly healthy doesn't make sense.  Massachusetts, for example, is focusing on people who really need care.  We're going to see states move toward more managed care for dual eligibles and other populations that are heavy users including younger, physically disabled adults.  States are moving there and moving there quickly.

If they need to make 5% savings in Medicaid costs, they could take a meat ax to the budget.  Or they can turn it over to the managed care industry and say "you're closer to the docs and hospitals; we'll turn over this population to you for 5% less than what they'd cost us and you figure it out."  Push back expected?  Sure.  But, states want to take a more sophisticated approach than the meat ax.

States are just overwhelmed.  They lack adequate work force.  They lack resources.  They are anticipating implementation of ACA overlaid over everything else.  Pretty limited capacity.  This is part of why states are looking to the managed care industry for help.  We know what needs to be done but we can't do it.

The big cost is in the duals, i.e. people eligible for both Medicaid and Medicare.  The big money is in LTC.  The future of state revenues is never going to be 6.5% growth per annum again, more like 4%.  Combined with escalating Medicaid cost at 8% or 9%, it's a big problem.  We're going to have an adult conversation about what we expect out of government.

When asked about the CLASS Act, Mr. Salo had this to say:  CLASS is a challenge.  It is one of the most well-intentioned parts of the ACA.  The only piece of the legislation that really tried to think differently about LTC.  I'm not sure my members see CLASS as being a sustainable model.  The question to our friends at Health and Human Services is the extent regulations can overcome the substantial problems with CLASS.  I love the idea of getting people to buy into more of a social insurance model, but as I see opt-in vs. opt-out, and the financing available, I don't see how it can work with literally every participant checking his watch on the five-year period to qualify for limitless benefits.  I just don't know what the regs could do to fix that.

LTC Comment:  Remember the last time we tried to solve the health care financing problem by moving everyone into managed care?  How's that working out for you?  The idea that Medicaid can deal with skyrocketing expenditures for its sickest and poorest recipients by selling them to the managed care industry seems like a non-starter to me.

So I asked what I think is the obvious question.  Why not get rid of the Maintenance of Effort rules that tie the states hands and let them achieve the needed savings by targeting Medicaid to people most in need?  Why should Medicaid protect $500,000 of home equity?  Why not close this and other loopholes so that most people would plan ahead for LTC and never end up as "dual eligibles" in the first place?

Matt Salo's answer:  Challenging MOE is perceived as an attack on the ACA.  We couldn't get consensus on repeal of MOE within the Medicaid Directors.  We do think there needs to be more common sense applications of it.  MOE has been too aggressively enforced.  Congressional staff wrote it extremely broadly and very intentionally.  They wrote broadly so they "could keep states from doing bad things."  But MOE has prevented states from doing sensible things as well.  States probably would not have just dumped a lot of people off the Medicaid rolls.  MOE is so strict now that it prevents sensible program integrity measures.  For example, some states are using self attestation of assets.  Now they realize they have to make sure people actually live in the state and their income is what they say it is.  One state wanted to ask for two pay stubs to verify income but the feds said they can't do that because it violates MOE.

Another issue around MOE is transferring or hiding assets.  States try to stay a step ahead of Medicaid planners, but have been told that also violates MOE.  Seems like a common sense thing to do.  There are states trying to look at level of care criteria.  There is a very definite institutional bias.  States have looked at ways to recalibrate level of care definitions and steer people out of nursing homes.  They're being told they can't do that under MOE.

There is a huge federal disincentive to states to pursue fraud and abuse.  There used to be a provision that within 60 days of states identifying an overpayment, they had to reimburse the federal government in full share.  They weren't even allowed time actually to recoup the overpayment.  It just didn't pay for states to identify fraud when they had to be 100% sure they could recoup the funds.

LTC Comment:  MOE is the single biggest obstacle to reforming Medicaid's LTC program.  It stands in the way of sensible measures to preserve Medicaid as a safety net for the poor and to encourage others to plan responsibly for long-term care.  The only way to solve the exploding cost of dual eligibles is to prevent people from becoming dual eligibles in the first place.  That is precisely what our LTC plan will be designed to do.