On February 3, 2011, the Secretary of Health and Human Services (HHS), Kathleen Sebelius, sent a letter to state governors outlining potential methods for states to reduce their Medicaid costs. The Secretary’s letter was submitted in response to concerns raised by governors about the Medicaid program’s substantial drain on their states’ dwindling state budgets. At the outset of the letter, the Secretary reaffirmed the Obama Administration’s commitment to assist states in balancing their budgets while still providing critical health care services to those who need them. The Secretary pointed out that the Administration had already provided support to states to address such concerns by working with Congress to pass and later to extend the enhanced Medicaid federal match (i.e., Federal Medical Assistance Percentage or FMAP) provisions of the American Recovery and Reinvestment Act. The Secretary acknowledged, however, that the enhanced FMAP provisions are scheduled to expire June 2011 and that states are continuing to face substantial budgetary constraints as a result of, among other things, rising Medicaid costs.

Responding to these concerns, the Secretary outlined the following potential cost saving measures to assist the management of their Medicaid programs:

  • Modify Medicaid Benefits. The Secretary pointed out that states have flexibility to change or limit optional benefits under the Medicaid program (e.g., prescription drugs, dental services, and speech therapy) through a Medicaid state plan amendment, particularly for higher-income enrollees. States also have the ability to increase cost-sharing for certain enrollees.
  • Manage Care for High-Cost Enrollees. Noting that 25 percent of Medicaid expenditures are spent on one percent of enrollees, the Secretary indicated that states could reduce expenditures for such enrollees through the implementation of initiatives to, among other things, strengthen systems for providing long-term care, provide better primary and preventative care, and lower the incidence of low birth weight babies.
  • Efficiently Purchase Drugs. The Secretary pledged HHS’s commitment to ensure that states have accurate information regarding the costs of drugs to facilitate “prudent purchasing decisions.” For example, HHS has undertaken a national survey to create a database of actual acquisition costs.
  • Assure Program Integrity. Emphasizing that the three-year weighted average national error rate for Medicaid is 9.4 percent (i.e., $33.7 billion), the Secretary indicated that there were new options available to states to address Medicaid program integrity. These include, among others, HHS’s Medicaid Integrity Institute webinars, a new federal portal identifying excluded providers, the use of federal audit contractors, and the use of predictive modeling and analytics which are now being developed for the Medicare program.

The Secretary indicated that this letter and the above cost-saving measures were “just the beginning” of HHS’s discussion with states on how they can better manage their Medicaid programs and navigate their budget crises. HHS stated that it would host a series of “virtual” meetings with state health policy advisors and Medicaid directors to share additional Medicaid cost-saving initiatives.

The Secretary’s letter appears to suggest that there will be significant changes by states to their Medicaid programs. As states attempt to address budgetary constraints and the rising costs of their Medicaid programs, the scope and benefits offered under the states’ Medicaid programs will likely change. This letter also seems to underscore the Obama Administration’s intent to be much more actively involved in the management of state Medicaid programs, particularly as health reform is rolled out.

A copy of the Secretary’s letter is available by clicking here.