Briefs & Reports

State Budget

While the Michigan Department of Human Services and Michigan Department of Community Health were combined in April into the new Michigan Department of Health and Human Services, legislative action on the Fiscal Year (FY) 2015-2016 budgets occurred separately for the two former departments. The House/Senate Conference Committee on the Community Health budget finished its work on May 28th. On February 12, 2015 HMA published a Special Edition of The Michigan Update with information on Governor Rick Snyder’s budget proposal for FY 2016. In this issue we focus on major changes for FY 2016 that are retained in the legislative proposal and those that were modified.

In total the appropriation for Community Health programs represents an increase of more than $1.5 billion from the amount appropriated for the current fiscal year. State general funds are increased by $111.9 million. Much of the total funding increase relates to full year implementation of the Healthy Michigan Plan (HMP) and was included in the Governor’s budget. The legislative proposal also represents a significant increase from the Governor’s recommendation: an increase of $590.8 million in total, of which $227.3 million is state general fund revenues. Higher revenues estimates from the May revenue estimating conference were critical to development of a budget without any major programmatic cuts.

Health Insurance Claims Tax
The Governor’s budget included an Issue Brief in support of his proposal to increase the Health Insurance Claims Assessment (HICA) from 0.75% to 1.3% and elimination of a statutory cap which would have increased HICA collections by $180 million. The Conference Committee did not agree to the Governor’s proposal to increase the HICA from 0.75% to 1.30%. The Conference Committee further estimated that HICA collections will be $27.1 million less than the baseline budget. As a result there was a decrease in special revenues of $207.2 million and a corresponding increase in state general fund costs from the levels in the Governor’s budget.

Dental Access
The Governor’s budget also included an Issue Brief on dental access. Two policies were proposed. One was expansion of access to dental care for children by extending the Healthy Kids Dental program to Kent, Oakland and Wayne Counties for children through age eight. The second proposal was to move the adult dental benefit to a dental managed care provider with higher reimbursement rates. Each of the Governor’s dental access proposals was scheduled for implementation partway through the fiscal year and would require additional funding for full year implementation in FY 2017.

The Conference Committee expanded on the Governor’s proposal for Healthy Kids Dental by increasing the coverage to all children ages 0 to 12 in Kent, Oakland and Wayne Counties (the only counties not fully covered by Healthy Kids Dental in 2015). However the implementation was delayed until June 1, 2016 to reduce the FY 2106 cost. The cost of the legislative proposal is $37 million, which is more than the $21.8 million the Governor had proposed. Since this initiative is only in effect for the last four months of FY 2016, an estimated $74 million will be required for full year funding in FY 2017.

While both chambers considered options to increase dental access for adults, at the end of the process the Conference Committee did not agree to the proposal to increase funding of adult dental services and to move adult dental to a managed care contract.

Hospital Reimbursement
The Governor’s budget and the final conference committee recommendation contain significant changes in Medicaid hospital reimbursement. The largest single item is additional funding for Medicaid Access to Care Initiative (MACI) payments to the HMP. MACI payments only apply to fee-for-service Medicaid. The original assumption had been that almost all HMP services would be delivered through Medicaid managed care. However more than a year after implementation of HMP, there are on average about 120,000 HMP enrollees receiving care on a fee-for-service basis each month. Since HMP reimbursement should parallel “traditional” Medicaid reimbursement, the state is proposing a modification to the HMP reimbursement that would add MACI payments for hospitals that serve HMP enrollees. The proposed amount for the FY 2016 budget is $318.2 million. (Note: if the reimbursement modification is approved it would be effective with the start of HMP in April 2014. As a result, there is the potential that hospitals could receive up to $784 million in additional MACI payments between now and the end of FY 2016.)

The Governor’s budget had restored several cuts to hospital reimbursement made as part of a FY 2015 executive order, but proposed that the non-federal share of these hospital payments be changed from state funds to hospital assessment funding (Quality Assurance Assessment Program, or QAAP). The Conference Committee recommendations are as follows:

  • Obstetrical Services in Rural Areas: The Governor’s budget eliminated $11 million in payments for obstetrical and newborn care at hospitals that qualify for the special rural hospital payments. The Conference Committee did not concur and retained funding for these payments aimed at supporting continued access to obstetrical services in rural areas of Michigan.
  • Graduate Medical Education (GME): The Governor’s budget restored a previous $14.5 million cut to GME payments, but changed the non-federal share of financing from state general funds to hospital assessment funding. The Conference Committee also restored the funding but disagreed with the use of QAAP as the non-federal share of the payments. Instead the Conference Committee retained use of state general funds as the non-federal revenue source.
  • Special Rural Hospital Payments: The Governor’s budget restored a $5.8 million cut in special payments for rural hospitals. However the Governor’s budget proposed that all state funding be removed from the entire $34.8 million pool (replaced with $13.6 million in QAAP funding). The Conference Committee concurred with restoration of the cut, but did not concur with use of QAAP to fund this program.

Hospital Taxes
While the Conference Committee did not agree with some of the Governor’s proposals to increase hospital taxes to fund specific reimbursement policies, the Conference Committee made an across-the-board increase of $92.9 million in the amount of hospital quality assurance assessments. At the same time the Conference Committee increased funding for Hospital Rate Adjustment (HRA) payments for the HMP population by $92.9 million. (The Conference Committee noted that for FY 2016 these HMP payments are still 100% funded by the federal government.)

Hospital Capital Cost Reimbursement
The Governor and Conference Committee both propose a modification to the calculation of hospital capital costs which is projected to reduce hospital payments by $34.8 million.

Managed Care Savings
The budget assumes that Medicaid managed care will generate the following savings:

  • Pharmacy: While the Conference Committee rejected the Governor’s proposal to carve the pharmacy benefit out of Medicaid managed care plans, the budget assumes a savings of $54.6 million from movement to a uniform formulary and pharmacy management by the HMOs. This is a higher level of savings than what the Governor’s budget included.
  • Laboratory Reimbursement: Executive Order 2015-5 assumes laboratory reimbursement savings effective August 1, 2015 by changing the benchmark from Medicare rates to Medicaid fee-for-service rates. Total savings are $31.8 million.
  • Managed Care Integration Savings: The Governor and Conference Committee assume that Medicaid HMO rates can be reduced by $15.4 million to reflect savings from managed care coordination.

Other Medicaid Changes

  • Program Integrity: The budget adds 10 positions for the Medicaid Inspector General and additional third party liability (TPL) activities and assumes that these initiatives and other TPL initiatives will reduce Medicaid expenditures by $37.5 million.
  • Primary Care Rates: The budget includes additional funding to continue paying primary care providers at rates that are halfway between historical Medicaid rates and Medicare rates. The policy cost $72.5 million in FY 2015 and the annualization to a full year results in an additional cost of $24.2 million.
  • Ambulance Rates and Fees: The Conference Committee increases Medicaid ambulance rates by $8.6 million to be funded a new quality assurance assessment program for ambulance providers. There is a net savings to the state of $1 million because the state retains a portion of all QAAP revenue.
  • Use Tax Actuarial Soundness: The Conference Committee also included $16.8 million to cover the cost of the use tax paid by Medicaid HMOs.

Quick action is expected in the full House and Senate, with the budget presented to the Governor in early June.

For more information, contact Eileen Ellis, Managing Principal, at (517) 482-9236.