North Carolina Medicaid: Caught in the Middle of a Political Stand-off

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North Carolina’s Medicaid program provides healthcare for 2.2 million low-income seniors, disabled persons, children, and their families.  The state Medicaid program costs over $14 billion annually, with the federal government contributing $2 for every $1 paid by the state.  Currently, the state Medicaid program operates under a fee-for-service model.  For every service that a provider renders to a Medicaid enrollee, the service is billed to the state at a predetermined reimbursement rate.  This reimbursement model limits the state’s ability to budget for Medicaid spending, as it reimburses providers based on the volume of services delivered rather than the quality of care and population health.  Under the new system, North Carolina would pay five managed-care companies a per-person rate to handle that person’s total healthcare.

The Managed Care Model

In 2015, the North Carolina General Assembly enacted legislation directing DHHS to transition Medicaid to a managed care model.  Under managed care, the state contracts with insurance companies, which are paid a predetermined set rate per person to provide all medical services.  This model is more attractive to the state for a few key reasons.  First and foremost, managed care provides budget predictability.  This model allows the state to better budget for Medicaid spending by shifting the risk and uncertainty onto private insurance companies known as managed care organizations (“MCO’s).  Proponents argue that MCO’s administer health plans much more efficiently than state Medicaid agencies by engaging in sophisticated network contracting, claims processing, and provider utilization management systems that squeeze out low-value care and improve the health of beneficiaries.  Contracting with Medicaid MCO’s reduces the volume of state administrative activities, such as utilization review and prior authorization, thereby reducing the state’s administrative expenses relative to Medicaid.  By shifting the administrative responsibility to MCO’s, the state can offer flexibility in benefit packages and can avoid politically troublesome negotiations over provider payment contracts.

Moreover, managed care also provides incentives for insurers to promote better health outcomes, which in turn leads to better population health.  The theory behind managed care is that an MCO can increase its profit margin by finding innovative ways to improve the health of beneficiaries.  Because healthy patients cost less than unhealthy patients, insurers can retain higher profits by working to keep their population healthy.  This includes addressing important “social determinants of health,” things such as housing, access to nutrition, transportation, and exposure to violence that can seriously undermine a person’s health but are rarely paid for in our current healthcare system.  With the expansion of Medicaid in many states, managed care models have emerged as innovative, efficient means for administering state Medicaid programs.  As of 2017, 39 states had contracts in place with Medicaid MCOs providing comprehensive care to Medicaid beneficiaries.  With an increasing number of individuals qualifying for Medicaid, the managed care model is a practical solution to alleviate administrative burdens on many state Medicaid programs.

Gridlock in North Carolina

 In September 2015, the General Assembly enacted the “Transformation Act”—North Carolina Session Law 2015-245, requiring transformation of the state’s Medicaid program from a predominantly fee-for-service model to a Medicaid managed care model.  For the last four years, DHHS has worked diligently to design a managed care program that is responsive to the needs of beneficiaries, as well as clinicians, hospitals, and health plans.  Using a competitive procurement process, DHHS evaluated proposals submitted by insurers and ultimately awarded managed care contracts to five insurers.  In total, the five contracts, which will last for three years with the option to extend for an additional two years, are worth $6 billion per year.

North Carolina’s transition to managed care was on track to go live February 1, 2020—insurance contracts were awarded, and open enrollment had begun for Medicaid beneficiaries.  For the first time in North Carolina, Medicaid beneficiaries would have the ability to choose the health plan that was right for them.  However, last October, DHHS Secretary Mandy Cohen warned a legislative oversight committee that the February 2020 rollout could not begin without $218 million in needed startup funding contained in the Republican state budget compromise that Governor Roy Cooper vetoed last June.  Despite Cohen’s warnings, the General Assembly adjourned in November 2019 without providing new spending and program authority necessary for the managed care transformation to move forward.

The months-long budget stall is a result of a stand-off between Governor Roy Cooper, a Democrat, and Republican lawmakers in the General Assembly, with each side blaming the other for the delay.  Last year before the General Assembly adjourned its session Republican lawmakers were able to secure enough votes to adopt a “mini-budget” billthat would have released $502 million for the managed care transformation project; however, Governor Cooper vetoed the bill because it did not include funding for North Carolina to go forward with the Affordable Care Act’s (“ACA”) Medicaid Expansion.

The ACA’s expansion plan allows states to use federal funds to expand their state Medicaid coverage to low-income adults earning up to 138 percent of the federal poverty level.  As with many of the Obamacare reforms, the expansion has remained a highly contested issue for the past decade, with support starkly divided along party lines.  North Carolina remains one of 14 states, mainly in the Southeast, to reject Medicaid Expansion entirely.  Expanding Medicaid in North Carolina would expand Medicaid eligibility to an estimated 650,000 low-income adults who could qualify for federal aid.  Unfortunately, Governor Cooper’s veto did not accomplish Medicaid transformation nor Medicaid expansion.  Mitch Kokai, a senior policy analyst with the John Locke Foundation, said that “in essence, Governor Cooper is saying, ‘You won’t give me my expansion.  I won’t give you your reform.’”

Legal Implications

Just 75 days before the scheduled launch of managed care, DHHS Secretary Mandy Cohen announced that DHHS would be suspending the implementation of managed care indefinitely.  Amidst the growing uncertainty surrounding the managed care transformation, some have questioned Cohen’s authority to make such a decision.  According to Senator Joyce Krawiec, “contracts are already awarded, the federal government already approved a waiver, and state legislation requires that everybody be enrolled, and the rollout begin by April 2020.  Secretary Cohen does not have the authority to unilaterally change the law and un-award the contracts,” stated Krawiec. Cohen has clarified this concern, stating that, “the contracts still stand.  They don’t activate until the day we launch managed care.”

Senator Krawiec’s concerns bring to light another potential issue—how the insurers will respond to the delay in managed care.  The five insurers that were awarded contracts have relied on such contracts and accordingly expended significant time and resources in preparation for the February launch date.  Addressing these concerns, Cohen stated, “we are not suspending the contracts with our managed care entities, we are suspending the work of implementation.”

With the budget stalemate in the General Assembly and DHHS’ desperate need for funding, it is clear that Cohen had limited options in deciding to suspend implementation.  However, this begs the question of whether the insurers have potential claims against the state for delaying implementation of their contracts—contracts that would earn those insurers $6 billion annually.  DHHS Deputy Secretary of Medicaid, Dave Richard, suggested that it is likely that the managed care companies will lay off contractors and technical experts they already hired to lay the groundwork for the transformation project.  “We realize that this creates much uncertainty for them, and they have to make decisions about their workforce dedicated to this initiative,” Cohen said.

Repercussions of the Delay

The delay in the implementation of managed care has repercussions for providers and the state of North Carolina, as well.  Hospitals and healthcare professionals have already been through complicated negotiations with MCOs to negotiate payment contracts for Medicaid services under the new model.  These contracts will not be able to go forward until managed care is launched.  Additionally, with the delay, North Carolina will have to update the waiver proposals that were submitted to CMS and the federal government to get the initial approval for the transition.

In choosing to veto the latest mini-budget, Governor Cooper overlooked the significant amount of work that has already gone into the Medicaid managed care transformation.   Furthermore, by using Medicaid Expansion as a bargaining chip, Governor Cooper deprived the state’s existing Medicaid population of the benefits of managed care and left many beneficiaries confused as to the status of their coverage.  While the department has not yet calculated the cost of the suspension, DHHS Deputy Secretary for Medicaid, Dave Richard, estimated that it would be in the millions, perhaps in the tens of millions of dollars.  Fortunately, the delay is not expected to affect Medicaid beneficiaries’ existing coverage.  In essence, NC Medicaid will continue to operate under the fee-for-service model administered by the department until our legislative leaders and Governor Cooper can come together to reach a health coverage compromise.