Capital Goods: April 2014

A second opinion
By Scott Mooneyham

Soon after taking office, Gov. Pat McCrory began talking about making a fundamental shift in how the state handles one of its heaviest responsibilities — oversight of Medicaid, the health-care program for the poor. He bemoaned how hard it was to predict costs and set budgets. “We cannot make good decisions without good information,” he complained in February 2013.
At that same appearance, N.C. Health and Human Services Secretary Aldona Wos proclaimed, “Cost overruns will not be tolerated or accepted. There is a budget for a reason.”

It didn’t take long to see what the governor and his top health-care aide had in mind. As some states have, McCrory wanted to turn Medicaid over to private managed-care companies — essentially insurers — allowing them to assume its risks as well as its rewards. Pushing the idea of putting the program out to bid, with the winners receiving a set amount per patient per month, McCrory predicted a big shake-up. Of course, big shake-ups aren’t always welcome by those being shaken.

In this case, those rattled and roiled would have been doctors, hospitals and others who treat Medicaid patients. In North Carolina, this is a $13 billion-a-year program. About a quarter of that comes from Tar Heel taxpayers. It represents about 17.5% of the state’s general operating budget. That money goes to providers in a simple fee-for-service system. Reimbursement for each service is tied to a percentage of the amount paid by Medicare, the federally operated program for the elderly.

Docs like the system as it is. Sure, they might have to deal with government bureaucrats, but they don’t have to fight with or get second-guessed by insurers. In fact, there are no insurers taking a slice off those billions for their profits, which would be the case with 
a managed-care Medicaid program — even though profit provides an incentive to hold down costs. The promise of keeping those costs in check is what made the idea attractive to the McCrory administration.

But something happened on the way to a managed-care Medicaid program. McCrory discovered he needs doctors and hospitals as much as they need him. Some of that can be explained by simple politics. The sheer size of that side of the health-care industry means elected officials must handle them with care. There are roughly 180,000 licensed health-care professionals in the state, about 23,000 of them physicians. With those numbers, doctors and hospitals wield serious political clout in North Carolina.

There was more to it than that, including something McCrory had not fully considered at the outset. While he has talked about turning his Commerce Department into a public-private partnership, Medicaid — even absent managed-care entities — already is one. For the most part, the doctors and others who treat Medicaid patients are not employees of the state. Most operate, within the confines of Medicaid, as independent contractors. To believe that substantial changes could be made to the program without their buy-in and cooperation was unrealistic. So McCrory decided to take Medicaid down another path, one that doctors and hospitals are willing to walk with him.

What his administration ended up endorsing in late February are called accountable-care organizations, networks of providers that are supposed to offer seamless care to patients. Providers in the network get financial incentives and suffer penalties based on their ability to keep patients healthy and out of high-cost treatment. Doctors keep their fee-for-service system; state government gets some promise of tamping down costs. Critics, particularly in his own party, might accuse McCrory of caving in to a powerful lobby; they might say he has embraced a reform that encourages more health-care consolidation.

What he may have actually done is avoid a lot of trouble and upheaval — and not just with doctors and hospitals. While the initial plan might have delivered some savings, states have seen managed-care companies pick up and leave when anticipated profits didn’t materialize. Another complaint is that managed-care companies cherry-pick healthier Medicaid populations when bidding, forcing states to continue fee-for-service arrangements for the sickest — and most-expensive — groups. As for consolidation, North Carolina’s big regional hospitals have been heading that way for some time anyway.  Accountable-care networks are unlikely to accelerate that trend.

By settling for something less controversial, McCrory might wind up with a nice political score that provides him something to crow about. After such a tumultuous first year in office, even a political victory that resulted from a recalculation ought to be welcome.

Scott Mooneyham is editor of The Insider, www.insider.com. Email him at smooneyh@ncinsider.com.