North Carolina’s Fiscally Irresponsible Medicaid Reversal – Pacific Research Institute

North Carolina’s Fiscally Irresponsible Medicaid Reversal

A fundamental management tenet advises organizations to understand their core competencies, and solely focus on these functions. All other tasks should be outsourced to organizations who specialize in providing these services.

For more than a decade the North Carolina state government has been following this advice with respect to its Medicaid program. Like most other states, North Carolina has been outsourcing management of its Medicaid services to private organizations.

Until now.

Governor Roy Cooper and Health and Human Services Director Mandy Cohen have engineered a reassertion of state management of these services from the company that had been effectively managing Medicaid for North Carolinians for more than a decade.

Reasserting state control risks the gains that had been made. North Carolina’s success serves as an important case study for other states looking to reduce costs while improving the overall quality of their Medicaid programs. Consequently, it is worth reviewing the benefits the Cooper Administration is jeopardizing by reasserting government management of the Medicaid program.

In 2005, North Carolina began outsourcing Medicaid services to Cardinal Innovations Healthcare, a managed care organization, or MCO. Basically, the arrangement created a set fee that the state would pay Cardinal, and then put the responsibility of managing costs on the MCO. If Cardinal kept costs down, then it earned a profit on the difference between its costs and the state’s reimbursement fee. If not, then Cardinal experienced a loss.

Over time, Cardinal effectively kept costs down. When Cardinal first began operating in 2005, North Carolina was spending $276 per month, per Medicaid enrollee for the services outsourced to Cardinal. As of 2017, Cardinal had reduced that cost to $105 per month, per enrollee. In aggregate, Cardinal was saving North Carolina taxpayers almost $80 million every month.

Importantly, these cost savings did not come at the expense of quality, and Cardinal’s clinical performance (better care) has never been challenged.  For example, in 2016, the Institute for Medicaid Innovation named Cardinal as the country’s best Medicaid plan overall, but also singled Cardinal out for its best practices in providing care for at-risk children. Even the state of North Carolina’s own annual reviews of Cardinal’s quality was consistently high.

Cardinal was also compliant with all mandated cost thresholds. According to federal law, Cardinal can spend a maximum of 15 percent of its revenues on administrative costs. Put differently, MCOs like Cardinal must spend at least 85 cents of every dollar to pay for Medicaid enrollees’ healthcare services.

So, how did Cardinal perform compared to the benchmark? According to the state’s own audit of Cardinal, as of 2017, the company’s administrative expenses were 8.5 cents of every dollar — well below the federal standards.

Outsourcing the management of Medicaid services to Cardinal enabled North Carolina to create a low-cost, high quality Medicaid system for the people of North Carolina.

In light of this successful track record, the decision to squeeze out Cardinal’s Board of Directors, and its CEO Richard Topping, in order to reassert government control of Medicaid is questionable at best. In an attempt to justify this decision, the Cooper Administration raised questions regarding the company’s expenditures on company parties and other alleged ‘lavish’ spending.

The overall performance of Cardinal illustrates such findings are meritless. Cardinal had been meeting or exceeding all cost and quality benchmarks that the company was required to meet. Further, by law, the difference between the state payments and actual Medicaid costs is net revenues for the company. How the company spends that net revenue is simply not relevant to the state.

The Cooper Administration is framing a small portion of Cardinal’s business expenses as ‘lavish’ to create political cover for an otherwise financially unjustifiable decision. On the merits, North Carolina has benefited greatly from its MCO relationship. Perhaps most troubling of all, its false claim of financial mismanagement, has reversed an otherwise fiscally responsible reform.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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