By Chris Cotner and Kate Tussey
The national healthcare debate has waxed and waned for decades, with the obvious recent history of Clinton's failed foray and Obama's push for national health care reform. Two main drivers behind the discussion are the rapidly rising cost of health care (HC) and the massive baby boomer generation entering retirement. An additional qualifier since the recession has been the increased number of uninsured, either by way of unemployment or underemployment. Even before the Affordable Care Act of 2010 (ACA), states were concerned about paying for HC services in this projected environment. After the act, 26 states entered a class action suit against the federal government, 17 states passed laws opposing the act, and 44 states filed legislative measures opposing elements of the legislation. The issue is clearly not resolved.
Some of these same drivers also affected social services (SS) budgets in the states. After Clinton's massive revision of welfare law in the 1990s, public assistance roles were drastically reduced. However, with the recent recession, unemployment, underemployment, and employment without benefits, HC have once again been on the rise in the states. While the recessionary forces are temporary abnormal drivers of social services budgets, states must still contend with this short-term spike and plan for providing services moving forward.
In all states combined, HC and SS will account for 34.8% of all funds expenditures in 2012. This is the largest budget expenditure for the states (with education closing in around 31%). In the recent environment of decreased state revenues in the sluggish economy, budget cuts have been the norm. As I wrote in my previous article (here), FY 2012 is the first time in decades that states budgets have decreased on the whole. With the prospect of rising costs and budgets in HC and SS, there is good reason for states to be concerned.
I wrote about the good news of overall budget projections for the states in a previous article (here). Despite the net loss in FY 2012, state budgets are expected to flatten and begin upward growth in FY 2013. However, drilling down, there is more news around which to rally.
As part of our continued analysis of state and local budgets and spending, Deltek developed a set of statistical projection models to examine future trends in the HC and SS verticals. What we found was more good news. Quite simply, the HC and SS verticals are projected to increase at the state level (see Figure 1, below) moving forward in FY 2013. The following analysis explains both the methodology and projections in greater detail.
Figure 1: Health Care & Social Services Total State Spending (Actual and Projected)
Click to view Full Size
All good models start with good data. Deltek has accurate, sound data on state budgets (including IT) through FY 2012 for all states and into FY 2013 for some. However, having current budgetary data in itself is not enough to develop projection models. In order to project out past our current data, other data projecting various variables in the states are needed. For example, in HC and SS, variables such as population, population groups, unemployment, birth rates, and poverty rates all have the potential to correlate and impact spending levels. However, getting accurate projection rates for all of these variables for all states is simply not possible.
Within the haystack of available data, the Census Bureau produces some of the best projection data around. In fact, their projection of the 2010 U.S. population made in 2005 was off by only 0.06 percent. In terms of projection, businesses would give whatever they could afford to have a crystal ball that accurate out to 5 years. With this in mind, we used Census data to create the HC and SS projection modeling.
Using Deltek's particularly robust budget data, combined with the Census' accurate past data and future population projections, we were able to create excellent models (highly correlative and highly predictive). Combining the HC and SS projections for FY 2012 for each state and comparing them with the actual FY 2012 data produced identical results. While this is evidence of both good data and subsequent modeling, this kind of accuracy cannot be expected for each year moving forward. Nonetheless, we are certainly in the proverbial ballpark.
However, HC and SS budgets are tricky in the states and projection for the individual verticals is complicated. In the simplest terms, Medicaid funding is used in both areas. Most public budget areas that seem mostly health care related always include some social services functions, and vice versa. A good example might be a clinical health program providing mostly health services. However, if funded in part by Medicaid, the clients receiving services will most likely be eligible for case management in the program that will reach beyond just health care. For example, an individual receiving specialized Medicaid-funded health care in a hospital will also be offered case management and social services linkages in the community through the discharge process. In this way, it is difficult to fully track and assign funding to one vertical or another. Complicating matters even further states and localities have looked to streamline services by grouping as many publically-funded services together. In effort to be more efficient, services are less compartmentalized, and, thus, funding is more mixed.
Taking a look at Figure 1, above, the projection looks similar to my previous budget projection data (here).There is an uptick in FY 2011 for combined HC and SS budgets (likely the result of stimulus spending and the ACA), followed by a decrease in FY 2012 (the result of stimulus funding running out, the recession catching up with budgets, and most states engaging in budgetary reductions). Looking closer, the gains in HC and SS spending from FY 2011 to 2012 were modest, with a 9.5 percent gain. This growth is very close to the overall 9.7 percent gain for all combined funds in state budgets over the same period. While growing, HC and SS spending occupied virtually the same percentage of state budgets from FY 2010 – 2013 (26 to 27 percent for HC and 8 to 9 percent for SS, respectively). In FY 2012, HC and SS funding decreased by a combined 5.2 percent. In this environment of projected increases in HC and SS funding and a history of steadily advancing budgets, this is an excellent picture of the budgetary pressures under which the states are operating.
Evaluating the 95 percent confidence intervals, it is still possible for more HC and SS loss in FY 2013 – 2014. However, this would be highly unlikely and been seen as an outlier event. Even in this worst-case and highly unlikely scenario, the model indicates likely budgetary growth in FY 2013, with strong indications of growth in FY 2014 moving forward. However, all factors point to the news being better than this worst-case projection. In FY 2013, state spending in the combined HC and SS verticals should flatten and begin getting back on track with a projected annual growth rate of at least 1.0 percent.
Given some of the numbers quoted in media outlets about skyrocketing health care and human service costs, this projection may seem a bit low. However, these projections consider many interdependent factors. States are working to streamline and reduce budgets in every area possible. As mentioned previously, states are working diligently to combine funds, health care, and social service functionality to improve efficiency. Also, while health care costs to individuals are increasing, the states are generally able to manage and provide health care at rates lower than those of individuals seeking service through private providers. While HC costs are projected to rise, state budgets include many more items other than direct service provision to citizens, which further adjusts costs. This figure also includes both HC and SS budgets, with SS budgets increasing at a slower rate than HC. Additionally, Medicaid reimbursement rates have undergone a series of reductions under both the Bush and Obama administrations, which is helping reduce some of the costs to the states. So, the final numbers represents the combined all funds, all state HC and SS budgets considering all of these mitigating factors
Additional analysis on individual HC and SS funding is available for subscribers, here.
Analyst's Take – Kate Tussey
It shouldn't come as a surprise that HC spending will continue to rise among the states, even with governor's yearly goals year dedicated to controlling Medicaid spending. As in the Justice and Public Safety market, federal agencies such as the Centers for Medicare and Medicaid (CMS), Center for Consumer Information and Insurance Oversight (CIIO), and the Office of the National Coordinator (ONC) were, and will continue to be, drivers for change in the HC technology field. Despite a federal budget crisis, feds have and are on schedule to cough up large amounts of grant funding for a range of initiatives, including health insurance exchanges (HIX), Medicaid management information system (MMIS) development, and development costs associated with integrated eligibility systems.
States are seeing a break in IT systems spending surrounding MMIS and eligibility systems until 2015, when 90/10 funding returns to normal match rates (here). But that doesn't mean smaller dollar amounts for vendors. CMS estimates 25 states will be replacing MMISs between FY 2011 - 2015 at an average cost of $50 million over three years, with eligibility systems costing the federal government an estimated 42.9 billion. Same goes with HIXs – between planning grants, early innovator funding, and Level 1 and 2 grant opportunities, you would think states would have costs covered. Early planning documents from several states, however, place yearly maintenance costs of HIXs ranging from $20 million to $50 million per year. This doesn't include future contracting opportunities for call centers, web site development, health insurance navigators, tax systems, etc.
For more of Kate's analysis on HC and SS spending and IT projections, subscribers can click here.
Analyst's Take – Chris Cotner
With these uncertain and fluctuating financial times, any good news is welcomed by the business community. HC and SS budgets are projected to grow in FY 2013 and beyond. Given that state HC and SS budgets are coming off of one of the only declines in recent history (FY 2012), this is certainly good news. However, there are still some cautionary considerations. While the overall budgets are improving, an individual state's HC or SS budget can experience sharp fluctuations from year-to-year with changing political priorities and projects. Second, the immediate future of HC and SS funding will still show a net loss for FY 2012. Third, while growth is projected, with annual overall growth rates at around one percent, this market will not see the sharper growth it did during stimulus funding. However, with the continued population and demographic pressures, projected gains sure do beat past losses.
As companies settle in for the coming difficult months in preparation for slow growth out of the decline, what can they do? While I have rolled these out a few times before, I believe these six simple strategies are sound in this environment.
- Save the Date: Work toward strategies that capitalize on growth in FY 2013.
- Hunker Down: Vendors may need to focus on service and existing contracts to help make it through the hard times.
- Let the Wind Take the Chaff: Weaker companies will not be able to weather this storm by waiting for state purchasing to pick back up in the next fiscal year. As weaker companies fall aside, when procurement and opportunities pick back up, vendors should be well-positioned. In the meantime, continue to let officials know your enterprise is stable and ready for business when opportunities arise.
- Talk to Decision Makers to Create the Want: In state government, if a decision maker becomes interested enough in a business solution or product, as long as the purchase is below the threshold for legislative or cabinet-level approval, the funds can suddenly become available; things are moved around in the budget for items decision makers want.
- Get Creative and Cooperative: Governments want solutions that do a few simple things including: increasing efficiency (saving money), improving service to citizens, and creating job opportunities. Creative and cooperative solutions that do this are more likely to win.
- Engage Governments in Strategic Education: Deltek continues to read and hear from state officials who are interested in finding out the best possible solutions for the problems they face. Often, officials are not aware of the possibilities. Educate these companies about the possibilities well before any RFI/RFPs come out.
More specifically, Kate Tussey illustrated growth areas in the HC and SS market, above. Some of these are explored further, below:
- Governments are moving toward streamlining operations. One of the best ways to improve efficiency is through IT. Simply, these governments need to spend money in IT in order to save money and provide more efficient service in HC and SS.
- Public funding, including Medicaid, continues to be used creatively in cross-cutting initiatives. Siloed services are not efficient. While many state service providers may not understand all of the IT possibilities, they want integrated solutions. IT solutions that integrate functioning, funding, and services in this environment are more likely to win.
- Just as companies are moving toward quantitatively-driven analytics for business, such evidence-based approaches to government services are becoming even more important in lean budgetary times. Simply, the government wants the most efficient bang for the buck. HC and SS solutions that include data-driven and analytics solutions stand a better chance of winning contracts.
- The goal of all human services is to ultimately provide resources to enable citizens to move away from public support and no longer require services. While those in business are not in the business of working themselves out of jobs, this is par for the course in human services. Governments want solutions that allow for creative, accurate decision making that effectively links clients to the most efficient solutions for their individual problems. By collaborating with governments to provide solutions that allow for the best services possible for clients, vendors become part of the greater solution of a healthy and well society.
In closing, the HC and SS arena is unique in that the department (whether it is Medicaid or WIC) exists solely to help those citizens in need. An IT system that doesn't work could mean life or death for an individual and will be splashed across the next day's newspaper. While this is a hard market in which to operate, it is a goldmine of an opportunity.
Despite recent budgetary setbacks, spending is projected to improve in FY 2013 and beyond. The answer is not for vendors to retreat from the state and local market. Rather, the opportunity for growth is phenomenal. Governments need to save money and are desperate for any creative solutions they can afford. Most vendors in this market have some interest in improving the human capital; it is part of the business in HC and SS. Vendors really interested in winning business and making a difference should look toward not only remaining in the state and local market, but becoming more cooperative in their approach. Partner with governments. Participate in grants. Enter into-joint and mutually-beneficial ventures. Give back to the community by bringing a bit more than just a solution. In the health care, care is operative. In human services, service is essential. Work to improve the community you strive to serve through collaborative and creative solutions that allow the best quality care possible to be delivered.
To read the full analysis, subscribers can click here.
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