Each year, U.S. hospitals lose billions of dollars on Medicaid patients. With Medicaid expansion bringing millions more consumers onto the Medicaid rolls, hospitals across the country are struggling to stem their losses. Here, Oliver Wyman’s Parie Garg and Frank Roberts provide insight into how hospital systems can manage Medicaid populations without abandoning their mission – or their bottom line:
Medicaid reimbursement has been a perennial source of frustration for hospital systems. According to the American Hospital Association, hospitals receive only 90 cents for every dollar spent caring for Medicaid patients. This gap between costs and reimbursements translated to an underpayment of $14.1 billion in 2014.
The magnitude of this underpayment will likely continue to grow as Medicaid expands under the Affordable Care Act. Because most hospital systems are also experiencing margin pressure in other lines of business, the extent of Medicaid loss is simply not sustainable for most systems.
Considering state regulations and the mission of many organizations, avoiding Medicaid patients is not a tenable answer. How, then, can hospitals operating in a fee-for-service environment mitigate losses within the Medicaid line of business?
In our work, we have observed two effective strategies:
- Stop the admission before it starts. Considering that visits and admissions are not margin accretive for Medicaid patients, this population can benefit from the application of managed care concepts. Assessing which Medicaid populations have the highest impact on the system’s bottom line is the first step. Next, organizations need to develop targeted interventions that can keep these populations out of the hospital, from wellness, care management, and housing assistance to alternative sites for care delivery. In some cases, the analysis may justify additional employees or other expenses that are not reimbursed under current state Medicaid regulations. This might mean, for example, providing transportation to a clinic or buying air conditioners for high-risk patients to avoid ER visits. This is exactly what CareMore, a Southern California-based company that operates Medicare Advantage plans, did back in 2008 when a brutal heat wave was putting its senior patients at risk.
- Cut costs where possible. Hospitals can improve operations to reduce the amount of money lost per Medicaid patient. Identifying the facilities and service lines that are experiencing the greatest losses within the Medicaid segment, and uncovering the major drivers behind these losses, will help direct efforts towards reducing supply costs, improving staff allocation, and improving workflows. While these approaches have been helpful in the past, most provider systems have maximized their efficiency efforts, and perceive it difficult to 'squeeze more juice out of the orange.' As a result, reducing the number of hospital visits by Medicaid patients presents the greatest opportunity for hospitals to take cost out of their systems.
Solutions in action
The potential of this solution set is evident when applied to losses related to expectant mothers on Medicaid. For many community hospitals, pregnancies and related conditions represent a large number of diagnoses (frequently as much as 20 percent). Most hospitals are on a capitated, DRG-based system for pregnancies and deliveries. The lower-than-cost reimbursement structure is exacerbated by a high rate of potentially avoidable complications among Medicaid-covered individuals.
Recognizing that this population has a large negative impact on margins, some systems have developed managed care interventions. For example, a nurse home-visiting program run by the Oregon Health Authority led to a 31 percent reduction in early pre-term delivery. Meanwhile, some systems have chosen to modify their operations. For example, the University of Arkansas for Medical Sciences has reduced pre-term birth complications through a telemedicine program for high-risk pregnant women in rural areas.
Medicaid bleed need not be a given
Hospitals should take the magnitude of losses associated with Medicaid as a given. Hospital systems have an opportunity to improve the overall health of the communities they serve while also improving their overall financial picture by aggressively working to reduce the negative financial impact Medicaid patients can have on their bottom line.