Healthcare providers are often the first to feel the effects of Medicaid funding shortfalls.  Economic turmoil, federal law and political pressures leave states few options but to slash the rates they pay to providers or take other actions regarding program eligibility discussed in Part I of our Medicaid Budget Crisis series.  A recent Kaiser Family Foundation study found that 39 states cut or froze provider rates in 2010 and 37 states have either planned or implemented rate restrictions in 2011.   Yet, because Medicaid covers approximately 68 million beneficiaries nationwide, many providers continue to rely to varying degrees on Medicaid reimbursement.  As John Iglehart’s piece in the New England Journal of Medicine describes, in 2010 the program spent approximately $406 billion on acute and long term care, representing one sixth of the United State’s overall healthcare spending.  Assuming that the requirements of the healthcare reform law, The Affordable Care Act (aka PPACA) continue to take effect as scheduled, these numbers are expected to continue to grow, some estimate by over 16 million people. The challenge, particularly for healthcare investors, is determining which providers can benefit from Medicaid programs despite state budget cuts.  In a continuation of our series on the Medicaid budget crunch and its affect on healthcare investing, this post will consider some of the healthcare providers that are well positioned to flourish (or at least emerge relatively unscatched) as states and the federal government assess strategies for Medicaid budgets. 


The first type of business that are more likely than others to emerge as winners, or perhaps more accurately at least not be cast as losers, from the Medicaid budget crunch are those that do not rely heavily on state legislatures for their reimbursements.    A few provider types that fall in this category are as follows.


  • Dialysis Providers: The best example of this is dialysis providers who receive the majority of their payments from the federal government’s Medicare program. 
  • Preventive Care/Disruptive Healthcare Initiatives:   We have discussed in the past certain healthcare thought-leaders’ perspectives on the value of disruptive healthcare initiatives, a philosophical shift in the macro system of orienting care and incentivizing clinical outcomes.  As providers focusing on preventive healthcare and those geared toward different stages in the healthcare continuum flourish, those that are typically self pay or commericial-reimbursed rather than  government-reimbursed could be "winners" in the Medicaid budget crunch.
  • Primary Care Providers: As a result of PPACA, primary care providers are another group that should enjoy some insulation from state budget issues.  Assuming that PPACA is not repealed or rendered unconstitutional, the legislation calls for a temporary, federally funded two-year increase for payments to primary care physicians starting in 2013.  The increase would pay primary care physicians 100% of the rate that Medicare pays primary care physicians, rather than the historically lower Medicaid rates that each state sets.   At least in the short term, this enhancement should insulate primary care physicians from the volatility in state budgets and, at least for providers in some states, give primary care physicians a significantly enhanced reimbursement rate for each patient that they treat.   
    • Unfortunately, the extent to which this enhanced reimbursement will benefit primary care physicians depends on the state in which a physician practices. While state Medicaid programs have historically reimbursed primary care physicians at lower rates than Medicare, the degree of difference varies dramatically between states.  In 2008, states like New York and California reimbursed primary care physicians at less than half the rate of Medicare.  Therefore primary care physicians in these states stand to gain significantly from the PPACA’s rate enhancement.  On the other hand, states like Alaska, Wyoming and Idaho had Medicaid reimbursement rates that exceeded the Medicare reimbursement rate. Thus, at best primary care physicians in these states will likely see their rates remain the same or possibly even decline as state Medicaid directors reduce their reimbursement rates to bring them into line with Medicare.
    • Finally, primary care physicians must consider whether or not a two year rate enhancement is enough to entice them to open their clinics to Medicaid patients.  In 2008 only 42% of primary care physicians nationally were accepting new Medicaid patients. This compared with 61% of primary care physician accepting Medicare patients and 83% accepting privately insured patients.  For further detail on historical rates and primary care government program activity, see these publications by Stephen Zuckerman and Dennis Smith.


Other potential winners in the Medicaid budget crunch are those businesses who can provide better care with fewer resources and the vendors who will provide the tools to help healthcare providers reach these cost and quality improvement goals.


  • Managed Care Organizations:  A number of states are trying to overcome their Medicaid budget issues by pushing more of their Medicaid beneficiaries into privately run managed care plans.  In 2010 13 states and in 2011 20 states expanded their Medicaid managed care programs.  These plans at least purport to save states money and encourage more efficient care because they allow states to pay an insurance company a set fee for each Medicaid patient that a health insurer covers.  A recent USA Today article highlights the business opportunities that the recent state expansion of managed care, combined with the PPACA’s expansion of Medicaid, offers large healthcare payers like Aetna and UnitedHealthcare.  While many industry participants disfavor MCOs because of the manner in which they control costs, at least one state, Florida, is giving hospitals and doctors groups the chance to set up their own managed care networks and compete directly with traditional MCOs.  In theory at least, under this plan, providers will be able to take advantage of some of the business opportunities that MCOs see in the expansion of Medicaid managed care. 

·        Health IT:  Health information technology is another area that has received significant government investment over the past two years.  The American Recovery and Reinvestment Act of 2009 (ARRA) included approximately $27 billion worth of incentives for Medicaid and Medicare providers who “meaningfully” use electronic health records.  The incentives are substantial. Clinicians with at least 30% of their patients (20% for pediatricians) on Medicaid can qualify for up to $63,750 in grants. 


Ultimately, who wins and who loses as a result of a particular state’s Medicaid budget crunch largely depends on the state in which a provider practices.  Not every state is experiencing the same level of budget problems and not every state is exacting deep rate cuts to Medicaid providers.  For example, states like Oregon and South Carolina, with large Medicaid budget shortfalls, are resorting to large provider rate cuts, while states like Virginia may be able to avert any rate cut for the upcoming fiscal year other than for outpatient hospital care.  Healthcare providers and investors would be wise to consider the particular circumstances of their states and the providers’ reliance on Medicaid reimbursement when assessing the likely impact of the Medicaid budget crunch on their businesses.


*** The authors would like to thank Tim Hoppe, McGuireWoods LLP summer associate, for his significant contribution to this post. ***