Guest Columns

Understanding Medicaid reimbursement

Ben Mandelbaum, Chief Operating Officer of LTC Consulting Services and Senior Planning Services
Ben Mandelbaum, Chief Operating Officer of LTC Consulting Services and Senior Planning Services

Medicaid is a valuable program that is designed to pay for medical care for individuals who are unable to afford it themselves. Understanding the reimbursement process can get a bit complicated, and with our many years of experience as a Medicaid planning and consulting company, we'd like to discuss and shed light on the topic.

Depending on your state, Medicaid reimbursement methods are dependent on a variety of factors, but there are several criteria that remain fairly universal. Before we discuss the reimbursement processes, though, it is imperative that we get a good understanding of the different Medicaid models:

  • The Fee-For-Service Model

  • The Managed Care Model

The Fee-For-Service Model

With the Fee-For-Service (FFS) model, each service receives a specific reimbursement in exchange for the services rendered. FFS rates are designed to pay doctors only for the care that an individual has specifically received. Unfortunately, this exchange isn't as beneficial for doctors as working with patients who carry private insurance. This method of reimbursement is directly opposed to the Managed Care model (see below).

  • What states still use the FFS model? Over the past few decades, 38 states and the District of Columbia have switched their Medicaid plans to some form of managed care for at least part of their government programs. Twelve states don't, including Connecticut, Vermont and Oklahoma.

  • Who likes the FFS model and who doesn't? Since the Fee-for-Service model reimburses hospital invoices or doctor bills for itemized charges, it gives an incentive for healthcare providers to administer sometimes unnecessary treatments, because payment is dependent on the quantity rather than quality of the care.

    There are some benefits to the patient as they are not tied down to a limited amount of care: Their overall care is not managed by a healthcare coordinator as in the managed care model. Insurance companies shield themselves against these practices by setting limits for every Medicaid beneficiary. The individual states are evidently not particularly fond of this system, as it often costs more and the entire healthcare burden is on their shoulder.

The Managed Care Model

Thanks to the Affordable Care Act, more states are turning to managed care services in order to manage Medicaid spending. Approximately 70% of Medicaid recipients are currently enrolled in Medicaid managed care delivery systems. 

Under managed care services, the patient is considered as a whole, rather than through individual services. That means that no matter what services the individual receives, Medicaid pays out the same amount. That amount is then divided according to the services received. If an individual has received a low number of services, the providers are able to receive more money for each service. If they've received a high number of services, the providers will receive less per service.

This payment strategy is intended to ensure that individuals are not receiving medically unnecessary services while still providing every patient with the quality of care they need. There is concern, however, that patients will not receive the services needed due to doctors who feel that they have exceeded their current payment. Typically, these rates are determined by the number of people enrolled in the system, but they can also be adjusted according to such factors as the Medicare Economic Index (MEI)  and state-determined inflation adjustment rates that are unique to Medicaid.

  • What is the Medicare Economic Index and how does it work? The Medicare Economic Index (MEI) is a measure of practice cost inflation that was developed in 1975 as a way to estimate annual changes in operating costs and earning levels of doctors based on inflation and the cost of providing services.

  • Who is happy with this system and who isn't? Generally states are happy with this model for two reasons. One - they now pay the health plan a “capitated” fee — a flat fee — which can significantly bring down the cost. Two - this transfers the financial risk away from the state to the health plan, as well as the responsibility to deal with the healthcare providers.

    Back in the 1990s, a move from FFS to pure capitation unleashed fury from both patients and healthcare providers, since it incentivized doctors to provide fewer services regardless of sickness. This ultimately led to physicians avoiding the most costly patients. Most experts agree though, that under the managed care model there are fewer loopholes in the system. Services can be provided to many more needy individuals, and with far greater efficiency.

Medicaid reimbursement

Understanding the Medicaid system, where the money comes from and how it benefits each individual can be complex. Many doctors choose not to work with Medicaid due to the difficulty of dealing with that reimbursement. Thankfully, however, many doctors are willing to put in the effort for the sake of the patients who need it.

  • How does reimbursement work? This depends on the Medicaid model employed by that state. For the FFS model, typically the states' Medical Assistance program will pay providers a standard rate for a given medical service. Under the Managed care model, the state pays the MCO (Managed Care Organization) a capitated rate — a per-month/per-member payment — regardless of the services received. These amounts may be different from what doctors and healthcare providers are able to charge to private insurance companies or private individuals.

    In some cases, providers may petition for "enhanced" MA rates—that is, a higher-than-standard reimbursement rate depending on factors such as the FMAP (Federal Medical Assistance Percentage) rate and some other determining factors.

  • How does the FMAP work and how are MA rates affected? The Medicaid program is jointly funded by the federal and state governments, and the federal government pays states for a specified percentage of expenditures, called the FMAP. FMAP rates vary by state based on criteria such as per capita income. On average, the federal share is about 57%, but ranges from 50% in wealthier states up to 75% in states with lower per capita incomes — the lower a state's per capita income, the higher the state's federal matching rate will be. An example is Mississippi's rate is at a whopping 75%, while New York, New Jersey, Connecticut and many others are at 50%, which is the minimum FMAP rate. In other words, for every $1 in state funds spent on Medicaid in New York, the state can draw down $1 in federal matching funds, while Mississippi can leverage about $3 for the same $1 spent. Providers in states with higher FMAP rates can generally expect better reimbursement.

  • Are there any exceptions to standard FMAP rates? Yes, there are exceptions to the FMAP formula in certain scenarios. Beginning in 2014, the ACA established enhanced FMAP rates for services to individuals with incomes up to 138% of the Federal Poverty Level who were not previously covered by Medicaid. States that extend Medicaid coverage under the ACA receive an enhanced FMAP of 100% for the expansion population for the period of 2014-2016. This means that for this period, the federal government foots the entire cost of these newly eligible recipients and then scales down to 90% from 2020 going forward! This enhanced rate will not vary by per capita income like the basic FMAP, so this deal is quite attractive to states like in New York and New Jersey, as well as to providers in these states.

  • How much do states provide compared to private insurance companies? Generally, Medicaid payment rates vary from state to state, but for many services pays on average only about 60% of what Medicare or private insurance pays. This is why many nursing homes, assisted living facilities, and other providers do not accept Medicaid patients.

  • How long does it take for reimbursement? Who needs to contact whom? Many doctors and providers feel compelled, for moral and financial reasons, to admit a percentage of Medicaid patients in their practice, but are stuck between a rock and a hard place. Low reimbursement rates, frustrating waiting times and increasingly complex paperwork don't make for an easy reimbursement experience.

This is a brief overview of the background and process of Medicaid reimbursement for the various Medicaid models. As more states adopt the managed care model, as well as take advantage of the changes to health care brought about by the Affordable Care Act, we can expect significant changes in the years to come. Hopefully these changes will bring about increased health of all recipients, and health care programs with more sustainability into the future.

Ben Mandelbaum is the COO of LTC Consulting Services and Senior Planning Services.
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