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Managed care couldn’t fix states’ Medicaid budgets; a switch would ignore real solutions in Idaho

Managed care couldn’t fix states’ Medicaid budgets; a switch would ignore real solutions in Idaho

Niklas Kleinworth
August 21, 2023

Idaho has a distressing spending problem in its medical welfare program, Medicaid. The $4.7 billion price tag constitutes one-third of all state spending, and it is growing. Total appropriations for the program between the 2022 and 2023 fiscal years grew by 17% — six points faster than all other spending.

Lawmakers propose switching Idaho from a blend of funding models — including fee-for-service, value-based pricing, and managed care — to a comprehensive managed care model. The stated goal is to control the budget, but this move is far from a plan to control costs. In reality, it will sustain current trends in growth and cost rather than curb the welfare state.

Managed care is a system where states contract with private insurance companies — called managed care organizations, or MCOS — to cover Medicaid claims. This is different from other models where states pay providers directly for services as enrollees use them.

The benefits of managed care hinge on risk assessment. The state pays a flat rate per enrollee, making MCOs responsible for efficiently managing the Medicaid population. The state’s costs per enrollee are adjusted annually. This is to accommodate demographic changes in the Medicaid population and to ensure MCOs are not spending more than federally required limits on administrative expenses 一 capping MCO profits too.

Nationally, managed care does a lackluster job of saving money. 

Though 35 states cover at least half of their Medicaid enrollees under managed care, the national cost of Medicaid grew by $146 billion between 2017 and 2021.1 Even worse, states that use managed care do not perform better at controlling costs than others.

The record of Idaho’s neighbors in the five years preceding the pandemic shows mixed results for controlling Medicaid spending per 100,000 people. Managed care states like California and Washington saw comparably large growth in Medicaid spending to Montana, which did not use managed care. Meanwhile, other states like Wyoming (non-managed care) and Utah (managed care) each had small changes in spending.

Some advocates of managed care pointed to Nebraska and Utah as examples for Idaho to emulate. This is due to those states’ comparable enrollment numbers and demographic similarity to the Gem State. But neither of these states saw any true cost savings.

Utah’s spending in the pre-pandemic era was, on a per-member, per month basis, 14% higher than Idaho’s — and this was before either expanded Medicaid.  Worse yet, Utah’s compound annual growth rate in total Medicaid spending, 6.0%, was 2.2 percentage points higher than Idaho’s.

Nebraska did not fare much better than Utah under a managed care system. The Cornhusker State spent 31% more per member, per month, than Idaho. This resulted in roughly equal total spending compared to Idaho, despite Nebraska’s lower enrollment.

Managed care also did not lead to more budget stability. State budgets trends reveal that annual spending was moderately predictable, regardless of the management system in place. But staying on trend is very different from staying under budget. Nebraska and Utah struggled to keep appropriations at par with costs. Administrators in both states had to ask lawmakers for supplemental appropriations to cover unanticipated Medicaid spending. In the case of Nebraska, additional funds were specifically requested to cover an increasingly costly expansion population.

Managed care produces lackluster results because it fails to make an intentional attempt to reduce enrollment, use, or service costs. Instead, it perpetuates the existing system while ignoring the need to reduce welfare dependency.

Enrollment is a key driver of Medicaid costs, with expansion being the largest predictor of cost growth, regardless of state. In Idaho, expansion costs two and a half times more than what was predicted in 2018, surpassing $1 billion in the 2024 fiscal year.

Enrollment is a key driver of Medicaid costs, with expansion being the largest predictor of cost growth, regardless of state.

Tragically, the expansion population has been the lead driver in the use of services and benefits, such as  prescription drugs. The medical welfare system leaves Idaho with a population dependent on the government for prescription drugs and services with questionable effectiveness, and there is little room for providers to innovate. This is particularly true for drugs and services addressing mental health.

Managed care also does little to address integrity issues in the Medicaid system. The Centers for Medicare and Medicaid Services reports that Idaho spent two in every five dollars improperly. About one-quarter of these improper payments were due to eligibility issues. 

It is difficult to assess how much of this funding the state recovered after those issues came to light. Problematic policies from the Affordable Care Act, like hospital presumptive eligibility, prevent states from clawing back payments made on behalf of some who were ineligible for services.

For lawmakers to find solutions to Idaho’s Medicaid budget woes, they must look toward reducing the expansive welfare state as the key to controlling costs borne by taxpayers. This may entail solutions like repealing the harmful Medicaid expansion program, commissioning a full forensic audit of provider billing practices, and looking for alternatives to a federally controlled prescription drug benefit.

One of the biggest issues with the Medicaid bureaucracy is the administrators view enrollees as customers, designing the system to draw in more people. For businesses, more customers mean more revenue to sustain operations, more profits to reward good employees, and more success to build on. But the government is different. More enrollees do not correlate with more revenue, but they do mean more costs for all who aren’t on the system and less liberty for those who are. 

Change will come only by designing a system that drives people off the rolls. Medicaid should be working toward its own obsolescence, not its own growth. Until Idaho’s lawmakers work to address this fundamental issue, taxpayers will continue to feel the pressure from supporting the welfare state.

This article is a follow up to the Idaho Freedom Foundation’s presentation before the Medicaid Managed Care Taskforce on August 9, 2023. View the presentation here.

1Values calculated from the following sources: Expenditures Reports from MBES/CBES, (n.d.), Centers for Medicare and Medicaid Services; Legislative budget Book, (2015 – 2022), Idaho Legislature; Nebraska Medicaid Annual Reports (2014 – 2021), Nebraska Legislature; Utah Medicaid and CHIP Annual Report Enrollment data, (n.d.), Utah Department of Health and Human Services; State Population Estimates, (n.d.), U.S. Census Bureau.

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