There is considerable uncertainty surrounding the future of the Medicaid program.  At the end of June the federal government’s enhanced Medicaid reimbursement rate to the states ended. The loss of these federal funds has left states clamoring for additional ways to reduce their Medicaid budgets. At the same time, most Americans are keenly aware that the federal government is trying to get a grip on its budget deficit. According to a recent Wall Street Journal report,  this confluence of budget pressures has forced the Obama administration and congressional Republicans to consider cuts to the Medicaid program that may have not been on the table in previous budget negotiations. In a continuation of our series on the implications of the Medicaid budget crunch, this post will consider some of the providers that may suffer the most from the uncertainty surrounding state Medicaid budgets and the implications of the budget uncertainty for patients and the wider healthcare industry. 

Not surprisingly, healthcare providers who accept Medicaid patients are some of the biggest losers when states have to cut their Medicaid budgets. As noted in Part II of our series, since the start of the recession every state has either frozen or reduced provider rates for at least some Medicaid providers.  Part I of our series highlighted some of the proposed rate cuts in Nevada and other states are proposing similar cuts. For example Indiana recently extended a 5 percent rate cut for a number of services including inpatient and outpatient hospital services, home health services, non-hospital radiology providers, and skilled nursing facilities through June of 2013.  California wants to implement even steeper cuts, reducing reimbursement rates for a number of providers including certain hospitals, physicians, and long-term care facilities by 10 percent. 


As a recent article highlighting the impact of MediCal (the California Medicaid program) on the ambulance industry demonstrates, these cuts ripple across the entire healthcare system. In California, the average cost of an ambulance trip ranges between $586 and $673. California’s Medicaid program pays a quarter of this price, a rate that recent budget cuts will reduce by another 10%. This means that ambulance services have to shift costs, almost doubling the average rates that private payers pay for ambulance services to $1200.


However, there are signs that, in the future, states will not be able to rely so heavily on provider rate cuts to balance their budgets. In California, providers and patients sued the state to stop a series of MediCal cuts the legislature enacted in 2008 and 2009.  A federal district court judge and the Ninth Circuit Court of Appeals found for the plaintiffs and enjoined the rate cuts. The courts held that the cut violated federal law requiring MediCal reimbursements to attract enough physicians to meet the needs of patients. The Supreme Court recently agreed to hear the case. Oral arguments are set for this coming fall and a final decision is expected in the spring of 2012. 

The Obama administration is also taking steps to make it harder for states to cut the rates that they pay to Medicaid providers. In May, the administration proposed a new regulation that would create additional administrative hurdles through which states would have to jump to cut Medicaid provider rates. Among other things, the regulations would require states to show that patients have sufficient access to care before states can cut provider rates. This rule, and, potentially, the California court action, could at least blunt the effect of the Medicaid budget crunch on some providers.  States would probably still be able to reduce provider rates to control their Medicaid budgets, but they would also have to consider other option that might make the impact on provider rates less severe.


Unfortunately, some of the “other options” available to the states to balance their Medicaid budgets would still disproportionately affect healthcare providers. In a recent letter to state Medicaid directors, U.S. Secretary of Health and Human Services, Kathleen Sebelius, emphasized the flexibility states have in cutting so called “optional” Medicaid benefits detailed in the chart below. Federal law requires state Medicaid programs to cover such benefits as hospital and physician services, but grants states considerable discretion to cover other benefits such as prescription drugs, dental services, and speech therapy.  Secretary Sebelius suggested that states could achieve substantial savings by reducing these optional benefits, which constitute approximately 40% of total state Medicaid spending, totaling about $100 billion in 2008.

Mandatory v. Optional Medicaid Services

Mandatory Services (60% of Spending)

Optional Services (40% of Spending)

Inpatient hospital services

Outpatient hospital services

Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services

Nursing facility services

Home health services

Physician services

Rural health clinic services

Federally qualified health center services

Laboratory and X-ray services

Family planning services

Nurse Midwife services

Certified Pediatric and Family Nurse Practitioner services

Freestanding Birth Center services (when licensed or otherwise recognized by the State)

Transportation to medical care

Smoking cessation for pregnant women

Prescription drugs

Clinic services

Physical therapy

Occupational therapy

Speech, hearing and language disorder services

Respiratory care services

Other diagnostic, screening, preventive and rehabilitative services

Podiatry services

Optometry services

Dental services




Chiropractic services

Other practitioner services

Private duty nursing services

Other services approved by the Secretary

A recent report by the National Association of State Budget Officers indicates that legislatures across the country have taken Secretary Sebelius’s suggestions to heart.  The report notes that fourteen states reduced Medicaid benefits in fiscal 2011 and many are proposing benefit reduction for fiscal 2012.   Nevada eliminated all adult vision, hearing and other benefits.  South went even further, eliminating, among other things, podiatry, vision, and hospice services for adults; insulin pumps for Type II diabetics; certain wheelchair accessories and standard circumcision for newborns. 


Investors considering investing in healthcare businesses that provide a significant amount of “optional benefits” to Medicaid patients must carefully look at specific state Medicaid programs. Should the federal government or courts restrict states’ abilities to reduce provider rates, it is possible that more states will look to reduce or eliminate any optional services that they provide to Medicaid enrollees. Thus, those providers providing services like vision and foot care to Medicaid beneficiaries may find it increasingly difficult to do so. Of course, states vary in the amount of optional benefits that they have extended to Medicaid beneficiaries and in the severity of their Medicaid budget deficits.  Accordingly, investors would be wise to consider each state’s particular fiscal environment as well.