Redirecting Medicaid MCO Gains to Offset Network Provider Losses in the Time of COVID-19

2020 Q2 marked the arrival of the coronavirus pandemic, stay-at-home orders, school closures, social distancing, and a recession.  Families put off going to the doctor’s office for routine, non-emergency care.  Primary care physician practices and clinics that bill for each visit saw sharp drops in their revenues as patients stayed at home (pediatricians’ offices were particularly hard hit, with a 40% decline in visits).  Insurers did not have to pay providers for visits that did not take place, but they continued to receive monthly premium payments from their commercial customers and public programs, including Medicaid.  The result was a highly profitable quarter.  UnitedHealthcare, the nation’s largest insurer and a leader in the Medicaid managed care market with 6.2 million enrollees, recently announced earnings of $7 billion, or 14.3%, for the quarter ending June 30, attributing the gain “primarily to the unprecedented temporary deferral of care in the Company’s risk-based businesses.”

One of UnitedHealthcare’s subsidiaries operates in Virginia.  Virginia is one of 40 states that contract with managed care organizations (MCOs) to furnish services to Medicaid beneficiaries, including children and parents.  Currently, six MCOs participate in Virginia’s Medicaid managed care program for populations who need acute care services, rather than long-term care services and supports.  As in other states, use of routine, non-emergency services by Medicaid beneficiaries fell when the state shut down in response to the pandemic, cutting into the revenues of primary care practitioners and community health centers.  At the same time, MCOs continued to receive monthly capitation payments that had been developed on the assumption that enrollees would be using services as normal.  The Center for Medicaid and CHIP Services had issued policy guidance in May explaining the circumstances under which states could require MCOs to increase provider reimbursements through the use of  “state directed payments.” Virginia’s Medicaid agency, the Department of Medical Assistance Services, was paying attention.

On July 2, the agency directed each of the participating MCOs to increase payments to network physicians and non-physician practitioners by 29% for certain services provided between March 1 and June 30.  The services that qualify for the payment increase are Evaluation and Management (E&M) services billed through CPT procedure codes 99200 through 99499.  These include primary care, preventive care, and telehealth visits; EPSDT screens and treatments are commonly billed using these codes. (The state estimates that use of E&M services declined 35% to 40% during this period).   The MCOs are required to pay the increases by October 31.  The total amount of the transfer from the MCOs to providers is estimated at $30 million.

This “directed payment” strategy has a lot going for it.  The state will not spend any additional funds of its own to increase provider payments; instead, the funding will come from the unspent revenues that MCOs received in the form of monthly capitation payments from the state Medicaid program.  This makes the strategy particularly attractive at a time when state budgets are under enormous fiscal pressure.  It also solves for what Harvard Business School Professor Leemore Dafny and and Dr. J. Michael McWilliams of Harvard Medical School have dubbed the “free rider” problem—because it applies uniformly to all of the MCOs with which the state contracts, no individual MCO is put at a competitive disadvantage by increasing reimbursements to its network providers.  Even better, the MCOs can use the 29% payment bump to build up some good will with their network providers rather than remitting these funds to the state because their medical loss ratio (MLR) is too low.  And from the state’s standpoint, not only does this transaction require no new state funds, it will keep the federal share of the capitation payments in the pockets of its providers (the state might otherwise have to repay the federal government its share of any remittances from the MCOs).

Virginia’s strategy is not without drawbacks.  It did not put any money into the pockets of network providers during the months when their office visits and revenues dropped.  And because the payment bump is tied to designated E&M services billed rather than provider types, the providers who experienced a larger drop in billable visits during those months will receive less of an increase in revenues.  Finally, because the payment bump is tied to billings during a finite, past period, it will not offset provider losses that will occur if Medicaid beneficiaries continue to put off routine medical visits in the months to come should the pandemic remain out of control.

Nonetheless, among the options available to states for helping Medicaid providers,   Virginia’s “directed payment” strategy is one that other managed care states should seriously consider.  There is some hope for the provider relief funds appropriated by Congress in March, but the jury is still out on whether HHS will actually get meaningful fiscal relief to primary physicians and community clinics serving Medicaid beneficiaries and, if so, how quickly.   MCOs may be concerned about a redirection of a portion of their Medicaid capitation payments given the uncertainties going forward—the length and virulence of the pandemic, the expense of hospitalizations for treating COVID-19 patients, the costs new therapies and vaccines, the extent to which use of routine medical care will return to pre-pandemic levels, etc.  As Yale School of Public Health Professor Jacob Wallace and his colleagues note, states have tools at their disposal for calibrating the amount of funds redirected to providers to take these risks into account.

From this vantage point, the Virginia strategy looks like a win-win for states and primary care providers—and a badly needed one at that.

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