State Strategies to Manage Budget Shortfalls

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Case Study: Provider Reimbursement Reductions in West Virginia

The level of state Medicaid expenditures, the prospect that changes in federal policy would cut federal aid to the state and elimination of certain financing techniques led West Virginia's governor to convene a Medicaid Crisis Panel in July 1995 to recommend ways to reduce Medicaid expenses. Legislators and state officials participated in the deliberations and produced recommendations designed to cut total state Medicaid spending. Estimated savings for FY 1996, when some of the policies went into effect, were $52 million. The complete range of changes is expected to reduce total state Medicaid spending by $141 million in FY 1997, or approximately 10 percent.

Such significant reductions pose questions about the preservation of quality. The West Virginia Medicaid Crisis Panel made it clear in its analysis, Report and Recommendations, that quality care was as much a concern as cost reduction: "The panel's recommendations do not constitute and should not be taken as an endorsement of expenditure reductions in the Medicaid program as a matter of policy," but are meant as a balance between the "human and the budgetary aspects of the Medicaid program."

Most of the estimated $141 million in savings will come from reductions in provider payments. The most important single step has been a change to "prospective rate setting methodology," a technique by which a state pays a provider a specified amount for the coming year, and the provider must control costs within the amount. The technique forces economies on the provider, since Medicaid providers may not refuse treatment to Medicaid patients (although physicians may drop out of the program and thus not accept Medicaid patients). This is different from capitation because the payment is not adjusted for caseloads.

Other policies are intended to remove incentives to providers to treat clients as in-patients. These changes include reduced reimbursements for inpatient psychiatric treatment, reduced occupancy incentives in nursing homes and reduced reimbursements for what the panel saw as nonhealth-centered programs under the state Medicaid umbrella. And the panel recommended substantial reductions in the reimbursement for some specific services, such as lab work, x-rays, medical equipment and surgical centers.

The panel pointed out in its final report that its recommendations provide intermediate remedies and that systemwide reform would be required to create the proper incentives for provider and user behavior and to make Medicaid truly cost-effective. It noted particularly the inflexibility of the federal-state Medicaid partnership, with the clear implication that giving a state the flexibility to redesign its Medicaid services would prevent the need for make-do policies such as reducing provider rates.

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Written December 1996, posted January 2003, reviewed December 2003
Email statebudget-info@ncsl.org for more information.
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