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The Alaska Medicaid budget will be cut. State officials explain how they could do it.

Department of Health and Social Services leaders believe they can cut about $100 million out of the state’s Medicaid budget quickly while getting to the remainder of Gov. Mike Dunleavy’s goal of $225 million in state Medicaid cuts will be more complex.

The Dunleavy administration is planning a 5 percent cut to many, but not all, provider payment rates as well as changes to payment methodologies and administrative consolidations to save roughly $100 million; many of the proposed cuts can be done without legislative approval but do require permission from the federal Center for Medicaid Services, or CMS.

Administration officials have stressed in media calls and legislative hearings that the spending cuts have been developed in ways that will protect primary care access, small hospitals and general access to services while aligning payment levels with other public payer entities.

Dunleavy has pledged to eliminate the state’s $1.6 billion budget deficit without new taxes while restoring Permanent Fund dividend payments to their statutory calculation.

DHSS leaders said in a media briefing ahead of the initial March 19 House Finance subcommittee meeting on the department’s budget that the changes were expected to result in $94.6 million of savings to the state’s General Fund; the department’s presentation from the hearing stated $102.9 million of savings are expected.

They acknowledged that the goal of $225 million in cuts — other budget documents indicate upward of $270 million in General Fund reductions — to Medicaid services was a directive from the Office of Management and Budget that the department was subsequently tasked with meeting.

“Our division directors have truly been scrubbing all areas, working together, collaboratively, to try to find a variety of ways we can meet that $225 million objective,” DHSS Deputy Commissioner Donna Steward told the House subcommittee.

As of February, there were about 214,400 recipients in Alaska’s Medicaid program, according to DHSS.

A 5 percent provider rate cut and withholding inflation adjustments is expected to save $24.3 million in the fiscal year 2020 budget. However, the lower reimbursement levels will not apply to primary care providers, federally qualified health centers or at least 11 small hospitals across the state deemed to offer critical access to basic care in their respective areas of the state.

That means the state will primarily be counting on Alaska’s large hospitals to absorb the rate reductions without corresponding cuts to offered care.

Former Gov. Bill Walker’s administration implemented a 5 percent across-the-board rate cut last year, but it has since been restored to 2017 levels, Steward said.

DHSS officials are also planning a shift to hospital diagnosis-related group, or DRG, payment schedules, which are intended to encourage cost-containment by making a single payment that covers all charges associated with an in-patient stay for a given condition.

The shift to DRGs is expected to save the state $4.5 million per year.

Health and Social Services Committee co-chair Rep. Ivy Spohnholz, D-Anchorage, was critical of much of the Medicaid plan but said she’s excited to hear of the move to DRG billing for hospitals as it is “incremental steps towards value-based compensation” and more transparency.

Other changes to a cost-based methodology for late-stage renal disease treatment and more frequent amendments to the state’s preferred pharmaceuticals list would result in smaller savings, according to Steward.

“Right now we are not able to change the drug list quick enough to take advantage of a reduction in drug prices that happen on the national level,” she said, adding that the state has been amending its list about twice per year, while the federal list usually changes quarterly. The pharmacy pricing adjustments are expected to net savings of $2.1 million per year.

The leaders of some of Alaska’s largest hospitals have been highly critical of Dunleavy’s plan to cut Medicaid spending; they insist that provider rate cuts will simply push more physicians and clinics to stop accepting Medicaid.

Alaska State Hospital and Nursing Home Association CEO Becky Hultberg said in a formal statement that the administration’s plan “is not well thought out, realistic or achievable. It is simply a blunt instrument developed in response to the mathematical exercise required by the Office of Management and Budget.”

Steward noted that any provider rate changes must be approved by the federal CMS and monitored over three years to see how the change impacts providers or access to care.

She also said the rate adjustments will only last through 2020 as the administration identifies longer term cost savings in the second phase of its Medicaid overhaul. What exactly the second round of changes will consist of is unclear, as it will require multiple approvals and possible waivers from CMS, according to DHSS officials.

Hultberg wrote in testimony to the House subcommittee that the Hospital and Nursing Home Association conducted its own analysis of options for capturing Medicaid savings in 2017 and a consultant concluded that a provider tax and moving to DRGs for large hospitals could help and be further evaluated for implementation in 2021.

A former commissioner of Administration under former Gov. Sean Parnell, Hultberg also wrote to lawmakers that few quick and simple cuts to state government spending remain after five years of budget reductions without significantly disrupting the larger economy.

After drafting a report for the Hospital and Nursing Home Association on the economic impacts of Medicaid, longtime Alaska economist Jonathan King concluded that the proposed cuts would likely result in at least 8,000 job losses in the state.

Dunleavy’s proposed cuts to state Medicaid spending would also forgo upwards of $465 million of federal money in 2020, according to Steward.

Medicaid spending has helped insulate the health care sector from Alaska’s ongoing recession that has touched nearly every other industry in the state.

And while overall Medicaid spending in Alaska continues to rise, the state’s part of that bill is shrinking. According to the Legislative Finance Division, overall spending on Medicaid in Alaska has increased from $1.7 billion to more than $2.3 billion since fiscal year 2015, but the state’s portion of that has actually gone down from $724 million in 2015 to $677 million, which includes a $15 million supplemental budget request, in the current fiscal year.

Medicaid expansion, approved by Walker in 2015, has increased the federal government’s share of Medicaid payments and the Legislature has in recent years taken measures to capture all available federal Medicaid funding.

The House subcommittee rejected Dunleavy’s proposed budget cuts by a 5-3 vote that split along party lines, with majority member and Finance Committee vice chair Jennifer Johnston voting with minority member Republicans.

The cuts could become part of the budget later in the process or the governor could still veto a portion of the state’s Medicaid appropriation.

Administrative savings, dental care

Additional savings are expected from a host of smaller Medicaid program changes, including halving the time providers have to file claims.

Steward said a proposal to cut the period that providers and others have to file a claim after performing a service from 12 months to six months should help reduce the number of “aberrant” claims the department deals with. Illegitimate Medicaid claims sometimes arise when a provider retires or leaves Alaska but doesn’t notify the state about the change.

She noted that much of the $10 million in savings expected from time reduction would likely be a one-time benefit as some late claim filers will miss out on payments only once before changing their habits.

The department is also anticipating $500,000 in savings from implementing a nurse hotline to help guide individuals in making their medical care decisions. The hotline plan was generally well received by the subcommittee members.

To the contrary, a plan to cut about $27 million in Medicaid adult dental coverage — $8.2 million state savings and $18.7 million federal reduction — was not well received by Democrats on the House panel. General adult dental coverage is an optional Medicaid service.

Steward acknowledged that no analysis was done when it was decided that adult dental coverage would be cut from Medicaid but added that emergency dental procedures will still be covered and provide a “backstop” for patients.

Alaska Dental Society Executive Director David Logan wrote to the subcommittee that cutting preventative adult dental care would inevitably lead to more costly emergency room visits, which can only provide temporary relief.

“In most situations in health we want to push people towards the preventative care and not the emergency phase of care but in this instance, for example, we’re doing the exact opposite,” Rep. Geran Tarr, D-Anchorage, said. “We’re saying forgo the preventative care that’s less costly that will prevent more significant health problems.”

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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