Michigan is expected to join a growing number of states attempting to balance their 2020 fiscal budgets by cutting Medicaid rates paid to health plans.

Last month, Ohio cut Medicaid capitated — or per-member-per month payment — rates to health plans by 1.5 percent. Other states planning to cut Medicaid provider rates are New York, California, Colorado, Ohio, Alaska, and Georgia, according to Modern Healthcare, Crain’s sister publication.

Earlier this week, Gov. Gretchen Whitmer and the Michigan Legislature agreed on a budget deal to eliminate a $2.2 billion deficit for fiscal 2020 that ends Sept. 30. The deal includes taking back about $100 million in promised rates paid to health plans this year.

“States understand that claims and utilization way down and there is money they can take back” because plans are expected to produce higher margins, said Allan Baumgarten, a Minneapolis-based consultant said.

As part of the state budget deal, Dominick Pallone, executive director of the Michigan Association of Health Plans, said Whitmer and the Legislature have agreed to seek roughly $100 million from Medicaid health plans in either in reduced per-customer payments or through risk corridor adjustments to premiums, which would equal $35 million in state general fund savings.

“Plans are committed to going well beyond their existing contract requirements in giving money back to the state in these unprecedented times,” Pallone said.

Kurt Weiss with the state budget office declined to comment on the budget deal related to Medicaid for 2020 or 2021, which begins Oct. 1. He said the state is planning a revenue estimating conference later this summer to further develop a 2021 budget plan.

“Right now, the state is working with all of our stakeholders and partners in addressing the fiscal challenges given the economic crisis brought on by COVID-19, but there are no final plans or decisions yet around the FY 2021 budget,” Weiss said in an email to Crain’s.

“Michigan and the rest of the states are in need for additional federal aid for 2021 and we are waiting to see what actions Congress will take later this month to provide more funding,” Weiss said. “We will continue discussions with the Legislature and stakeholders, but we are in need of more information before final budget plans can be negotiated.”

So far, Michigan has received $3.1 billion through the Coronavirus Relief Fund money under the CARES Act.

On the proposed Medicaid rate cut, Margaret Anderson, chief marketing officer with Health Alliance Plan in Detroit, said “it would be devastating” if the state cut capitated Medicaid rates for its HAP Empowered Health Plan.

“We are working with DIFS to comply with what could be coming out. We don’t want to see more people fall through the cracks,” she said.

HAP Empowered, a Medicaid HMO with 18,717 members, reported an underwriting loss of $9.1 million and a net loss of $6.5 million for a negative 16.7 percent margin during the first quarter with a 95.7 percent medical loss ratio. Last year, HAP Empowered lost $1 million on operations and and overall $530,900 net loss.

In 2016, Michigan cut Medicaid capitated rates nearly 5 percent after Healthy Michigan Medicaid expansion added hundreds of thousands of new enrollees and health plans recorded higher than usual profit margins.

Made possible by the Affordable Care Act of 2010, Healthy Michigan now has about 750,000 members in addition to 1 million traditional Medicaid enrollees.

Pallone said Ohio’s 1.5 percent flat rate cut won’t impact health plans too much financially because it became effective in early June and expired at the end of the 2020 fiscal year ended June 30.

“They needed to hurry up and do something,” he said. “It is allowed and you don’t have to refile your rates (because) it is within 1.5 percent.”

Pallone said health plans in Michigan weren’t involved in the state budget negotiations, but are providing input about how the rates will be cut.

“We’ve been going back and forth on what this might look like and how to operationalize that,” he said. “There’s a lot of nuances that need to be ironed out on how to do something like this because it’s not something that happens every day.”

Pallone said health plans are willing to help the state because “they certainly need the money.”

But the $100 million contribution by the health plans does not go straight into state coffers.

“There are federal matching dollars involved (about $65 million) they state doesn’t get to keep,” said Pallone, adding that the state probably will have its future Medicaid matching funds withheld by the federal government as a repayment.

While Pallone said flat rate cuts are easiest, Michigan health plans are familiar with risk corridor payments. He said monthly payment cuts would be best for health plans to manage their finances.

“That’s traditionally what the state has done when we’ve had new populations. We’re not quite sure what the risk is for COVID-19 and we favor that approach,” he said. “It’s trying to find a fair approach that protects the plans and the state.”

Pallone said Medicaid profit margins are already fairly thin, averaging 2-3 percent the past several years.

“This year shouldn’t be an anomaly for that. So we’re trying to do what’s right by the state,” he said.

Pallone said the state Medicaid program also is just beginning to look at setting rates for fiscal 2021.

“The state is pressing to depress rates as best they can. It’s too early to give you a number as to what the what the percentage might be as we go into next year,” said Pallone, adding he hopes it is in the range of a 1-2 percent annual Medicaid rate increase.

“(Medicaid) is an entitlement program.We believe firmly that the rates need to be driven by experience using data, not by budgets,” Pallone said.

During the late 2000s, during the economic downturn, the state Medicaid program eliminated a number of services like chiropractic, acupuncture and pediatric dental to save money. He said the state previously also has talked about taking away pharmacy benefit services managed by health plans.

“This might save you a million dollars here or million dollars there, but will cost you money in the long term for the number of diabetic patients that we have on Medicaid,” he said. “Turning off pharmacy benefits would be a tremendous long-term cost to the state.”

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Michigan budget deal expected to cut rates paid to Medicaid health plans – Crain’s Detroit Business