State budgets and the expanding Medicaid landscape

Published: March 21, 2013

BudgetContract AwardsHealth CarePublic Finance

Written by Kate Tussey and Stephen Moss In such a tense political and fiscal climate, debates over state and local spending are rampant. As Deltek continues to analyze budgets proposed by governors across the United States, Medicaid funding is consistently ranked as a top priority. In lieu of the Affordable Care Act’s Medicaid expansion provision, an examination of the current state of Medicaid budgets and project spending seems appropriate.

Uncovering current Medicaid funding amounts is no small task, Deltek has learned. The U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (CMS) has only published funding amounts up to fiscal year (FY) 2010; however, states are currently planning for FY 2014, or FY 2015 in many cases. As a new feature of our state budget analysis project, Deltek is now collecting and analyzing Medicaid funding proposed by state governors.

From our budget work in February, Deltek analysts selected five states that represent diverse regions, sizes and populations across United States: Texas, Indiana, Virginia, Nebraska and Montana. These states also represent different decisions with regard to expanding Medicaid under the ACA. Texas and Montana have made definite decisions regarding expansion (no and yes, respectively), while Nebraska and Virginia are leaning toward a decision (no and yes, respectively). Indiana’s legislature continues to debate the merits of both.


Not surprisingly, the chart above illustrates that if each state chooses to expand Medicaid, an increase in funding will be necessary (100 percent of federal funds in the early years of expansion). On average, a state’s Medicaid budget would increase by 20 percent from the current proposed budget. Only Texas and Indiana would experience less than a 20 percent budgetary increase from the current proposed budget – both at approximately 14.5 percent.
This growth in the Medicaid budget is considerably higher, necessitated by the increase in Medicaid enrollment, than the average year-to-year growth from FY 2010 to FY 2014 (Table Below).
Without Medicaid expansion in FY 2014, the states highlighted experience an average spending growth of only 10 percent; that growth nearly doubles with Medicaid expansion. With those figures, it is no small wonder why states are engaged in vigorous debates regarding the future of Medicaid enrollment. This debate gets more interesting when one looks to projected Medicaid funding in the future. Each of states mentioned conducted a fiscal analysis[1] of Medicaid expansion and projected the Medicaid budget out to FY 2017 (and beyond in some cases). From this analysis, we can begin to understand what the full budget for Medicaid will look like in the coming years.   
Under these projections, some states will see massive increases in funding. Montana, Virginia and Indiana will likely experience a more-than 40 percent increase in funding for the three-year period. Conversely, Texas and Nebraska will likely increase by less than 20 percent for the same time frame, yet both states are the most skeptical of Medicaid expansion.   
The Medicaid vendor landscape
Several characteristics play into a state’s Medicaid management information system (MMIS), including policy changes (from the federal and state level), contracting requirements, and the extreme complexity of the program itself. States are increasingly looking toward systems that are modular, interoperable, and easily adaptable to any future health care reform requirements thrown their way – not three years behind schedule and $200 million over budget (as can be the case in the Medicaid enterprise).
Last year, Arkansas tried to spice up its procurement method to include smaller, modular components (versus a complete system overhaul), but found that at this point in time, neither the state nor vendors could support a fully comprehensive, modular approach. Still, procurement strategies have evolved beyond simple, customized solutions. Some states have explored procuring for claims processing solutions only, transferring systems from other states (with customization), or attempting to form a consortium (like Hawaii and Arizona). Michigan’s CIO described how the state was working with seven other states and Ontario, Canada, to discuss how to share MMIS technology instead of each state buying a separate customized solution.
The number of state-operated Medicaid management information systems has dwindled from 15 in 2002, to five in 2013 (with Illinois, Minnesota and Nebraska in the process of planning, procuring, or awarding a vendor-run MMIS). About half of state contracts fall into the range of $100 million to $200 million, with California, New York, and Florida topping at more than $500 million per contract (Xerox, CSC, and Hewlett-Packard, respectively). Understandably, California and New York have the highest number of Medicaid enrollees (per 2009 CMS numbers), while Texas is third.
While the estimated total value of state MMIS contracts is nearly $10 billion, two titans dominate the industry – Hewlett-Packard and Xerox – with 31 state contracts between them. The estimated value of their total MMIS contracts is $3.6 billion and $2.7 billion, respectively. The next closest vendors include CNSI, with five state contracts, and Molina, with four.

A total of only eight players are in this high-dollar market, which may be a reason behind procurement and contract implementation issues. With such a shallow number of vendors available to bid on an MMIS procurement, some states are left reviewing only one or two proposals. Holding several contracts helps in the request for proposals (RFP) process, but leaves little option for states to pick new, innovative solutions. Accenture was the newest player to enter the market, winning a $163 million contract in Iowa, but was confronted with a Noridian protest.
Analyst’s Take 
With expansion occurring in the near future, states have a laundry list of items to take care of, including updating aging eligibility systems and MMISs, and deploying health insurance exchanges. States need to be ready for a new population of Medicaid recipients that account for greater numbers and different demographics of eligible enrollees. If a state decides not to expand Medicaid, health insurance exchanges will see higher volumes of new enrollees for federally subsidized exchange coverage. With the influx of Medicaid funding, states (and the federal government) also have to be aware of fraud or abuse occurring in open-ended Medicaid payment formulas. State IT systems have to be able to keep up with whatever expansion decision is made, and the MMIS titans cannot afford any costly delays in such a crucial turning point of the U.S. health care system.
As the state budget project progresses, Deltek will continue to provide insight and analysis for state Medicaid budgets. In the meantime, be sure to download a free report summary of Deltek’s Health Insurance Exchange report and read up on the Medicaid vertical profile application. Not a Deltek subscriber? Click here to learn more about Deltek’s GovWin IQ database and take advantage of a free trial.
[1] The following links contain third-party and state fiscal analyses of Medicaid expansion: Indiana, Texas, Montana, and Nebraska. Virginia’s fiscal analysis was presented to the Senate Finance Committee and may be found in ppt form here.