The hospital and health system leaders we work with are extremely concerned about the financial impact their organizations may experience from potentially significant Medicaid policy changes, following the recent passage of a budget resolution by the U.S. House of Representatives. The resolution directed the House Energy and Commerce Committee, which oversees Medicaid, to identify $880 billion in overall federal spending savings.
The Senate recently approved an amended resolution that preserves the language directing the committee to identify the savings, though it is currently unclear how the House will proceed from there. However, if $880 billion were removed from Medicaid over ten years, the program would see nearly a 10% cut to total state and federal spending, which amounted to $872 billion in 2023. While many hospital leaders are uncertain on how to respond, they are keenly aware of what Medicaid cuts would mean for their organizations and their communities, and waiting for the dust to settle is an insufficient response.
As our colleagues recently wrote, modeling the impact of potential cuts and preparing for potential financial scenarios and impacts can help organizations identify strategies to respond to various permutations of policy developments.
Partnership strategies for an uncertain outlook
The path forward for health systems will be somewhat contingent on if and how the federal government makes changes to Medicaid and how states respond.
Some of the policy changes currently under discussion are strictly related to eligibility, like adding work requirements for Medicaid enrollees. Other proposals would reduce the amount of money provided to states, like by lowering the floor for the Federal Medical Assistance Percentage (FMAP) rate.
Any changes to state funding will prompt a series of painful decisions in state capitals. For instance, states might lower fee-for-service reimbursement to providers, reduce overall eligibility, reduce access or benefits, steer providers to value-based care (VBC) models, or make up any shortfalls through other spending cuts or tax increases.
States’ responses will also be influenced by their current budget outlook, political climate, approach to Medicaid administration and the degree to which they currently utilize VBC, managed care, and other healthcare delivery models—all of which vary widely state-to-state.
For now, mitigation strategies can help providers prepare for two critical potential changes: Medicaid eligibility and rate reductions. Both of these playbooks rely on partnerships with payers and other healthcare organizations, and both will be effective strategies in any future scenario regardless of policy changes, heightening the imperative to start building these relationships.
Eligibility-related strategies focus on helping disenrolled Medicaid members enroll in other forms of health insurance.
- Partner with Health Plans: Providers can partner with health plans (for both Medicaid and health insurance exchange-based plans) and brokers (for commercial insurance and Medicare Advantage) to help navigate patients to insurance. Some recently disenrolled individuals may have eligibility for other insurance or for subsidized exchange insurance. Health systems can partner with health plans to place plans’ enrollment specialists into providers’ facilities and develop effective referral processes.
- Partner with Community Organizations: For providers, integrating community organizations—many of whom already perform insurance eligibility work—into existing patient workflows or developing referral processes could increase insurance enrollment.
Payment rate-specific strategies are intended to help manage Medicaid utilization while accessing enhanced rates in some scenarios.
- Federally Qualified Health Centers Strategy: Working with federally qualified health centers (FQHCs) may help mitigate the risk of outpatient rate reductions, in the event there are no significant cuts to prospective payment system rates for FQHCs. Further, improving coordination with a local FQHC or developing a Health Center Program Look-Alike can improve management of the Medicaid and uninsured population, reducing costly emergency department (ED) visits and admissions.
- Preventative or Care Management Programs: With lower rates, the return on investment on preventative and care management programs for the Medicaid population increases. Health systems might develop their own programs, select a vendor, or partner with a health plan to jointly share expenses.
- Improve Telemedicine Access: Providing easy access to after-hours care can help reduce inappropriate ED utilization and manage patients at home rather than with a visit to an outpatient center. While behavioral health FQHC visits have permanent authorization to bill at in-person rates, other telemedicine services do not, so health systems should carefully consider which service lines are the best fit with a telehealth strategy.
Critically, these counter-measures to potential policy change should not be implemented in a vacuum and should be closely aligned with an organization’s broader enterprise strategy and ongoing performance improvement and transformation efforts.
Other considerations and closing thoughts
Moving forward, health systems should model the impact of various Medicaid cuts and other potential policy changes on their organization. Having a good understanding of total risk can help leaders identify where an organization is most vulnerable, and where to focus mitigation efforts.
From there, leaders can engage and educate their federal and state elected officials on the impact of policy changes on the providers that care for their family and their constituents.
Other policy actions have potential to materially disrupt health insurance exchanges. In particular, the Centers for Medicare & Medicaid Services (CMS) has proposed a new rule that would include new verification and eligibility requirements “to protect consumers from improper enrollments and changes to their health care coverage, as well as establish standards to ensure the integrity of the Marketplaces.” Critics argue the proposed requirements may be burdensome to consumers using the exchanges and reduce access to coverage. The Trump administration has also rescinded executive orders from the Biden administration that were intended to bolster Medicaid and the Affordable Care Act (ACA).
Health systems should also consider their exposure in a scenario where the federal government cuts Medicaid and allows expanded ACA subsidies to expire, likely boosting the uninsured population.
In addition, understanding and evaluating payer dynamics will be important to be able to develop a holistic approach to responding to Medicaid cuts.
Generally speaking, we do not view entering into VBC contracts as an immediate or obvious reaction to Medicaid eligibility or rate cuts. In a scenario where Medicaid eligibility is reduced, fewer enrollees may dampen the case for VBC, and with lower rates, the economics of moving into VBC aren't materially different than they were previously. Any voluntary shift to VBC contracts should be carefully evaluated.
Additionally, one of the biggest challenges with Medicaid Value-Based Payment (VBP)—its high patient churn and heavy focus on the pediatric population—will likely be exacerbated by eligibility reductions or rate cuts. However, states may respond to Medicaid funding cuts by either creating or accelerating an existing Medicaid VBP roadmap. Health systems should evaluate their readiness for taking risk in Medicaid and decide on a strategy if states push them towards VBP.
The uncertainty of potential Medicaid cuts and other policy changes—and the enormity of their potential effect on healthcare providers and the communities they serve—can be overwhelming for executive and Board leaders.
However, inaction is not a sustainable tactic. Critically, the strategies explored above—many of which are “no regrets”—can be executed by organizations today to help better prepare for the uncertainty ahead.
