The $350 billion Medicare-Medicaid dual eligible market is an extraordinary new business opportunity for health insurers, as well as a way for state Medicaid programs to generate significant budget savings and improve access and quality of care for frail seniors and persons with severe disabilities.  A dozen states are now looking at integrating Medicare and Medicaid health care for the nation’s 9 million dual eligibles – the high-cost patients enrolled in both programs (7 million with full benefits, 2 million with partial benefits).  Thirty-eight States and the District of Columbia have expressed interest in working with CMS on integrating Medicare and Medicaid financing and care delivery either through (1) integrated, fully capitated Medicare-Medicaid health plans or (2) managed fee-for-service with complex care management and Medicare sharing savings with the state.

At the Citi Global Health Care Conference in New York on February 29, 2012, Kip Piper, senior consultant with Sellers Dorsey, explained the dual eligibles market to a large audience of Wall Street analysts.  Kip outlined current federal and state activities, the business opportunities for health plans, and answer questions from investment analysts and other attendees.  Citigroup’s Carl McDonald, CFA, moderated the session.

Kip Piper – a former state Medicaid director, state health commissioner, health insurance executive, and official with the Centers for Medicare and Medicaid Services (CMS) and White House Office of Management and Budget (OMB) – advises health plans, state Medicaid agencies, health systems, and Fortune 500 healthcare businesses on Medicaid, Medicare, and health reform.

The following is a brief synopsis of Kip Piper’s question and answer session on the dual eligible market at the 2012 Citi Global Health Care Conference.

Q&A with Kip Piper on the Dual Eligibles Market for Health Plans

Question:

Regarding the California integrated care demonstration to enroll dual eligibles in health plans, the big question is, is Los Angeles County in or out and what are the arguments for and against it.

Kip Piper:

A couple things, with California Medicaid or Medi-Cal, as they call it, the legislature mandated a four county demo.  If the demo is successful, the legislature wants it to go statewide by 2015.  In his new state budget, Governor Brown has proposed a faster track to statewide use of integrated Medicare-Medicaid health plans for California’s 1.1 million dual eligibles.  Once fully operational, the California expects to save $2 billion a year.  With California’s 50% Medicaid matching rate, that’s $1 billion in state savings and $1 billion in federal savings.

My guess, just a guess, is that Los Angeles County could be left out of the initial four-county demonstration because of the local politics and push-back from some providers and advocates.  Hard to say but we’ll know soon.  However, the state will be eager to get Los Angeles County up and running as soon as possible.  In terms of the financing and the budget saving, the Governor and Department of Health Services will be eager to launch in LA County as early as 2013.

It may become a negotiating point as the Governor’s budget proposal is debated.  I think what you’re going to see is some horse trading between the Governor’s position – which is to go statewide quickly – and the original slower pace starting with a four county demonstration.

Question:

In terms of whether Los Angeles County is included, no place could be more successful than Los Angeles and the financial savings would be the greatest.  There are strong Medicaid and Medicare Advantage health plans unready in place in LA County, the relationships with physicians are strong, and the hospitals have a lot of the infrastructure built.

Kip Piper:

I agree.  There are many strong reasons to include LA County in the four county demonstration.  For the reasons you mention, it appears a relative lower risk than some other, less prepared counties and the health plans have much of the necessary infrastructure.  Also, the state is desperate for budget savings and Los Angeles County would generate more than any other county.

However, the state needs to balance this with other factors.  While health plans and some hospitals are eager for the initiative, many advocates and providers are concerned.  Long-term care is perhaps the biggest obstacle to fully integrated care for dual eligibles.  Most health insurers have no experience with nursing homes, home health, personal care, and Medicaid home and community-based services (HCBS).

Meanwhile, Medicaid long-term care providers – in contrast to the post-acute providers to which Medicare Advantage plans are used to working with – have little or experience dealing with health insurers.  Many institutional and non-institutional (home, community based) providers in Medicaid are small operations, mom and pop shops, or individuals.

Providers of long-term care services and supports often lack strong or sophisticated infrastructures – financial, administrative, information systems.  Some stakeholders face a steep learning curve for long-term care delivery and integrated, cross-service chronic care management.  It’s an unknown, new experience for most Medicaid long-term care providers and the advocates who are very, very close to these services.  The benefits are extraordinary but it will take time for some providers to adapt.

The other big factor goes back to the Governor’s budget.  Does the state go forward with the four county demonstration?  Or does California move faster and go statewide?  There are different models and approaches, but many states are moving fast with statewide integrated care for dual eligibles.  Across the county, we really know how to integrate Medicare and Medicaid for dual eligibles, drawing on expertise and lessons learned from several successful demonstrations and larger-scale efforts.

Inside Washington, for example, integrated care for dual eligibles is one of the few issues that most Democrats and Republicans in the Senate agree with.  About a dozen states are on a fast track for statewide contracting with plans in 2013 or 2014.  However, the Centers for Medicare and Medicaid Services (CMS) is taking a somewhat slower pace approach than the states.  CMS is moving on it much faster than we typically see with delivery and financing reforms, but ultimately to CMS this is a research and demonstration effort.

Question:

From a big picture perspective, in terms of health insurers, who’s in the better position to win in the Medicare-Medicaid dual eligibles market?

Kip Piper:

Generally speaking, Medicaid health plans will be better positioned than the Medicare Advantage plans.  Insurers with a large presence in both the Medicaid managed care market and the Medicare Advantage Special Needs Plan (SNP) market will be best positioned.  But, at a minimum, strong Medicaid health plan experience is critical.

In terms of benefits and service delivery, the requirements and processes are different, but Medicaid health plans do everything Medicare Advantage plans do, but they contract directly with states.  Compared to most pre-play Medicare Advantage plans and commercial insurers who are also in the Medicare Advantage market, Medicaid health plans are more experienced with diverse, complex patients on a large scale.  In many states, Medicaid health plans have developed experience that is more relevant in recent years as states contracted with them to care for SSI-only beneficiaries and other special needs populations.

Medicaid health plans and their behavioral health partners have far more experience with substance abuse and mental health care.  They are just used to dealing with behavioral health on a larger scale, both in number of patients and complexity of needs.  This area of competency is critically important since perhaps 40% to 45% of dual eligibles have a severe mental health diagnosis, such as a bipolar disorder or schizophrenia, in addition to multiple physical health diagnoses.

If you look at quality assurance, grievance procedures, information systems, reporting, compliance, financing, delivery systems and provider networks, advocacy, member relations, provider relations, risk adjustment, government relations – all of the different components – the Medicaid managed care aspects of these functions are as or more sophisticated and complex than what you have under Medicare Advantage.  So the number of steps that a Medicaid player has to make to become an integrated plan and to get a contract with the state are fewer than what a Medicaid Advantage plan has to do.

Generally, not everywhere, but generally the default’s going to be on the Medicaid side, making it much easier for the Medicaid plans since they’re already meeting those requirements.  It’s also easier for the state to expand their contractual relationships with their Medicaid plans.

Question:

Medicare companies, at least the regional ones, will acknowledge yes, Medicaid plans can win this business in an easier way than Medicare-only plans can.  But the Medicare Advantage plans say they used to managing care for old, sick seniors, while the Medicaid plans cover women and children.

Kip Piper:

There is a continuum with many factors.  Medicare plans and Medicaid plans are used to managing virtually the same services – hospital, physician, drugs – although the Medicaid benefit package is broader and more complex and networks tend to be different.  If this were the 1990’s, I’d agree that Medicaid plans have little experience with very high-cost or disabled patients.  But that has changed dramatically as states have increasingly expanded Medicaid managed care to special needs populations, ending previous carve-out policies.  And it’s not as if Medicare Advantage plans, even some dual SNPs, have been eager to enroll the highest-cost dual eligible beneficiaries.

Unlike Medicare Advantage plans, Medicaid plans are used to utilization management and medical management in an environment with virtually no cost sharing tools, which is the case for the dual eligible market as well.  Medicaid plans are used to the tighter, more restrictive marketing of Medicaid, enrollment brokers and auto assignment, the more sophisticated risk adjustment of Medicaid, and the stronger role of community based organizations.

So, in terms of provider networks, benefit designs, medical management, and experience with low-income patients, minority patients, and government policy safeguards, Medicaid plans are as or better equipped.  This is speaking generally, of course.  Ideally, a player has experience in both Medicaid managed care and the Medicare Advantage dual special needs plan (D-SNP) market.

It’s also important to note that demographically the dual eligible population is very different from the typical Medicare Advantage enrollee.  In addition to being very low income, dual eligibles are disproportionately African American or Hispanic, older, more likely to live alone, and more likely to speak a language other than English.  The diagnostic profiles and functional limitations are very diverse and the cost and utilization patterns vary widely.  Medicaid plans are more experienced serving diverse populations and typically have better, deeper relationships with communities and community groups.  However, this varies, with some D-SNPs fairly sophisticated.

Also, as you look at the dual eligible market, remember that there are segments.  Of the 9 million dual eligibles, 7 million are are enrolled in both Medicare and Medicare for all services.  But 2 million are partial dual eligibles – enrolled in Medicare with Medicaid paying for some or all of their Medicare cost sharing.  The partial duals don’t receive Medicaid services.  The relative mix of full and partial dual eligibles also varies by state.

Question:           

So let’s say you’re hired tomorrow by Humana, you’re put in charge of realizing dual eligible opportunities for us.  What’s your strategy?

Kip Piper: 

Honestly, Human needs a strategy for the dual eligible market.  It’s too big an opportunity.  They are a very strong player in the Medicare Advantage and Medicare Part D drug plan markets but have historically had a much more limited, tactical presence in Medicaid.

Humana is one of many national insurers who frequently go through phases with respect to their view of Medicaid and Medicaid market opportunities.  We’ve seen this with many of the big players over the years, including WellPoint, United, and Aetna.  They go through love-hate phases with the government markets.  Eventually, they start to appreciate that success in the Medicare and Medicaid markets requires different strategies, expertise, and skills and a unique, more sophisticated financial, medical, operational, compliance, marketing, and communications infrastructure.  They also learn, often the hard way, the importance of some degree of independence and operational separation of the Medicare and Medicaid lines of business from the commercial lines.

For a Humana, my advice would include:

  • Develop a focused, coherent strategy for both the Medicaid managed care market and the Medicare-Medicaid dual eligible market.  Under the Affordable Care Act, Medicaid enrollment is expanding by 40%, adding up to 24 million adults by 2016 and 28 million by 2019, according to CMS projections.  In addition to this, many states are already expanding their existing Medicaid managed care programs.  The dual eligible market is $350 billion, still largely unmanaged, with the potential for a large portion to be under capitation by 2015 or 2016.  The opportunities for top line and bottom line growth are too large to ignore.  And both are potentially well-aligned with Humana’s big Medicare Advantage presence.
  • Buy a strong regional Medicaid player or even consider buying a non-profit plan and converting to for-profit status with proceeds going to a community foundation.
  • Humana is a partner in iCare, the Wisconsin-based health plan with great experience managing care of high-cost disabled Medicaid beneficiaries.  Humana should leverage this to expand it in other states.
  • Keep the Medicaid business organizationally separate from the commercial business and be very careful before integrating it with the Medicare Advantage business.  The cultures and business lines are very different and those differences must be managed, respected, and understood.

In general, companies seeking to enter either the Medicaid business or the dual eligible business need to bring on some Medicaid savvy experts to their boards and executive teams.  Many of the commercial or Medicare Advantage players don’t yet have enough Medicaid-specific know-how.  Don’t make the mistake thinking that “we do commercial” or “we do Medicare” and assume that is enough.  Comparing Medicare, Medicaid, and the duals market, would be like saying podiatry, general surgery, and neurosurgery are basically the same.

Question: 

The dual eligibles market appears to be one of those rare situations where states are moving surprisingly fast.  What is it that’s pushing states to make integrated care for dual eligibles happen so quickly?

Kip Piper:

Pure, unadulterated desperation.  States are desperate for budget savings and this is a very large, obvious, win-win opportunity.  They are frustrated from years of looking at the dysfunctional, fragmented system of care for dual eligibles and the inability to leverage Medicare to make care delivery more efficient, accountable, and coordinated.

States have fewer Medicaid cost containment methods available.  Many have already cut optional services.  There’s only so far states can go in cutting already-low Medicaid provider rates.  The Affordable Care Act’s maintenance of effort requirements make it very hard to cut eligibility.  So with the usual mechanisms – rates, optional benefits, and eligibility – already tapped or newly restricted, capitation of services to health plans is a no-brainer.  When done right, it generates taxpayer savings while improving access, quality, and care management.

Dual eligibles are between 40% and 50% of a typical state’s Medicaid spending.  They are about 31% of Medicare spending.  Average per capita cost is about $40,000.  The best way of generating savings and improving efficiency and quality care is to combine the Medicare and Medicaid funding streams and contract with integrated, capitated plans.  That’s what about 15 states are looking at, although some states are also looking at managed fee-for-service arrangements that include Medicare shared savings.

In addition to the imperative to find budget savings and the natural advantages of integrating financing and care delivery, other factors have made it possible for states to move quickly.

In recent years, states, health plans, and other stakeholders have built a new array of tools – measures, systems, predictive modeling, advanced analytics, risk adjustment, complex care management models, and health information technology – that make integrated care possible.  These were not available ten years ago but, while still evolving and improving, now are abundant and largely tested.  Much has been learned from the PACE model, although unfortunately it was not scalable given tight federal policies.  Also, there have been a number of successful efforts in states, such as Arizona, Texas, Minnesota, Massachusetts, and Wisconsin.  There is now a base of knowledge and a cadre of seasoned experts.

The creation of Medicare Advantage Special Needs Plans in the Medicare Moderation Act (MMA) is a big help as well.  Through the SNP option, Medicare plans are able to exclusivey market to and selectively enroll only dual eligibles.  Most Medicare SNP plans are dual SNPs and the bulk of Medicare SNP enrollees are dual eligibles.  This allowed Medicare plans to generate new, valuable experience.  It also prompted Congress and CMS to introduce new safeguards for SNPs and to require D-SNPs to reach agreement with state Medicaid agencies if they wish to expand or create new D-SNP plans.

Last but not least, the Affordable Care Act created a new office within CMS to deal with dual eligible issues and the Center for Medicare and Medicaid Innovation to fund and support demonstrations.  The addition of CMS staff, grant funding, and an organizational epicenter for duals issues in CMS and the improved access to Medicare data have been a boon for state efforts.

Question:

What about mandatory enrollment?  Will CMS give states waivers to allow them to require dual eligibles Medicare beneficiaries to receive their Medicare service from integrated Medicare-Medicaid health plan?

Kip Piper:

Freedom of choice, as it’s called – the ability for Medicare beneficiaries to choose between fee-for-service and health plans for the Medicare Part A and Part B services – has always been an issue in Medicare.

Time will tell but that’s what most states are expecting.  CMS guidance is still fairly high level with much details coming from the states themselves.  In the end, it will only work with both a solid choice of high-quality integrated plans and mandatory enrollment.  It will likely evolve over time, with some states moving faster than others on mandatory enrollment with an opt-out.

Regardless, dual eligibles may be able to switch plans any month, rather than waiting for an annual open enrollment period.  They will also have additional safeguards, especially with regard provider networks, quality measurement, grievances and appeals, and care coordination.  These will hopefully address concerns.  It’ll be important to watch the standard terms and conditions CMS and states agree on in the first set of waivers.  Those will set the stage.

It’s important to note on the federal level, CMS isn’t the only decision maker.  Once a waiver has been negotiated between a state and CMS, it must then be approved by the Secretary of HHS (who typically defers to CMS unless there are tough negotiations involving a Governor) and then the White House Office of Management and Budget (OMB).  Given the potential for substantial federal savings on both the Medicare and Medicaid sides, OMB will likely be very supportive.

Question:

How do you quantify the potential savings?  How much of the savings will go to the state and how much to the federal government?

Kip Piper:

Typically, in setting capitation rates for Medicaid health plans for the first time, states assume to pay about 95%, perhaps less, of the fee-for-service level of spending.  In addition, states can assume some additional savings potential from the integration of Medicaid benefits, especially historically unmanaged long-term care, with Medicare Part A, Part B, and Part D benefits.

Each state will model this differently and use different actuaries, but it’s reasonable to assume that they will expect savings of perhaps 5% off what they are spending now in Medicaid for dual eligibles plus the equivalent of 5% Medicare FFS spending levels.  In this way, states are able to reasonably ensure budget savings since the dollars are taken off the top.

States may assume a somewhat higher Medicaid pre-set savings rate – for example, the equivalent of 1% of Medicare spending – because of the big potential from plans to reduce costs from care management, especially from reduced hospital admissions and nursing home admissions.  Many of those admissions for dual eligibles are preventable, so the savings potential is extraordinary.  Competition may generate some additional savings but states will be careful to set a floor to capitation rates.

The federal government receives all the benefit of any Medicare savings.  However, with encouragement from CMS, some states are looking at a managed fee-for-service model where Medicare shares its savings with states.  This model may work well in states with little managed care or in rural areas.

The Medicaid savings is split between the state and the federal government based on that state’s federal Medicaid matching rate.  Federal match for Medicaid benefits varies from 50% to 77%.  It’s based on a formula comparing the state’s per capita income to the national per capita income.

Nationwide, in the aggregate, the federal government pays for about 56% of Medicaid benefit spending and states pay about 43%.  In some states, like New York, counties cover a portion of the state’s share of Medicaid spending.  The federal match rate is updated every year.  In a state with a 50% match rate, like California, the state would get half the Medicaid savings and the federal treasury the other half.

Question:

What can integrated health plans expect to save in providing Medicare and Medicaid services to dual eligibles?

Kip Piper:

The amount of overuse, underuse, and misuse of health care services by dual eligibles is frankly staggering.  Based on best practices and the latest evidence, there are ample opportunities for savings, especially through avoiding hospital admissions, emergency department visits, and nursing home admissions.

Among the dual eligible population, reducing hospital and nursing home admissions by 20% or more is readily achievable.  There is also substantial savings over time from long-term care redesign, decreasing nursing home utilization, and supporting more beneficiaries in the home.

To achieve this, integrated plans will need to execute on several things.  For example, they will need comprehensive chronic care management programs, medication therapy management and medication compliance, in-home patient monitoring, care transition programs, population health systems, performance-based payment methods, risk sharing with long-term care providers, community-based collaborations, and strong decision support, predictive model, and analytical capabilities.

Staffing will be critical.  Successful integrated plans will need to add board directors who are savvy in the unique financial, political, programmatic, and compliance dynamics of Medicaid and Medicare.  Same with their executive and management teams.

Integrated Medicare-Medicaid plans will also need to create new high-performance systems of care for behavioral health and long-term services and supports.  Few plans have this now and this is essential.  Ultimately, to serve dual eligible patients well and generate the maximum savings, care integration will be needed at both the plan and provider levels.

Questions:

Which states should we track most closely?  Which do you expect to move quickly to either integrated health plans or managed fee-for-service with shared savings?

Kip Piper:

Here are some states that Wall Street analysts and investors should watch closely: Ohio, California, Arizona, Massachusetts, New Jersey, North Carolina, and Texas.  That’s a mix of states that’ll help give you a good picture on what is happening in the fast-moving dual eligible market.

Thank you for the opportunity to chat with you this morning.